Question

Based on class discussion determine, solve and illustration. D1

An (IFI) Islamic Financial Institution (IFI) invested in a two year project valued at USD.700,000 by providing 70% of the capital based on the Musharakah contract. At the end of the first year, the project value declined by 40%. What is the impairment loss of the project investment incurred by IFI?

       A.   Determine capital loss after First Year and impairment loss of the project investment incurred by IFI.   Since the project remains viable, the loss is carried forward to the next period then the net asset value. (4 marks)

                                                                                                                                              

        B   In subsequent period, performance is measured based on the outstanding capital. On the other hand, if the project is abandoned leading to the termination of the Musharakah contract, the IFI claims should be only? (4 marks)                                                                                                             

Answer 1

Answer:

A).

Value of project: $ 700,000;

Provided capital based on Musharakah contract %: 70%;

Decline in the projected value %: 40%

So, accordingly we can calculate the capital loss & impairment loss of the project investment by IFI:

Capital Loss after one year= Value of project * Decline in the projected value

=$ 700,000 * 40%

Capital Loss = $ 280,000

Impairment Loss= Value of project * Provided capital based on Musharakah contract * Decline in the projected value

= $ 700,000 * 70% * 40%

Impairment Loss = $ 196,000

B). Since the project remains viable, the loss is carried forward to the next period at net asset value of $ 420,000. In subsequent period, performance is measured based on the outstanding capital. On the other hand, if the project is abandoned leading to the termination of the Musharakah contract, the IFI claims should be only $ 294,000 (70% x $420,000).