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Calculating Zakah on Works Under Construction
Standard accounting definition and evaluation:
These are in progress construction projects, such as the construction of buildings and reclamation of lands. These may be converted, after completion, to fixed or interchangeable assets according to the goals of the project. These are evaluated on the basis of the construction costs until the date of preparing the budget. This may include the price of the land, costs for of the architect drawings, licenses, raw materials and labor. These are not considered as consumed until the work is done and the property is ready for use.

Evaluation and legal judgment:
If the intent of the projects under construction is to be used in the operating process, i.e. they become possession assets and no Zakah will be payable for them. However, if they were meant to be trade inventory, they will be evaluated on the basis of market value of the lands and raw materials and they are added to the assets that Zakah is payable for.

Calculating Zakah on Allocations
Accumulated funds represent the amounts of the revenues earned at the end of the fiscal year to meet a deficit in the assets or to meet a commitment due from an Establishment which had not properly been determined.

There are various kinds of provisions for the funds, such as:
1. Provisions for damages in fixed assets

* Standard accounting definition and evaluation:
This is a periodical amount of money reserved from revenues in order to meet the deficit in the fixed assets for purposes of use, operation, earning income or to assist the replacement process for fixed assets.
It is calculated in a technical, calculating method that differs as per the nature of the asset according to usual norms.

* Evaluation and legal judgment:
These are not deemed as commitments that must be subtracted from the assets liable to Zakah, as fixed assets are not counted in the assets liable to Zakah.

2. Accumulated funds for articles of exchanged assets

* Standard accounting definition and evaluation:
These funds are amounts of money that are reserved from revenues to meet the difference or to bridge the gap between the registering and the current values in applying the principle of care-taking.
Evaluation is based on the lesser of the two; the cost or the market value.
Some examples of these provisions are the following:
- A decline in banknote prices.
- A decline in the price of real estate meant for trade.
- Doubtful debts due to the debtor.

* Evaluation and legal judgment:
As the evaluation of the exchange assets meant for Zakah depends on their market value, these assignments are not regarded as part of the commitments that are subtracted from Zakah assets.
If, for any reason, these exchanged assets for purposes of Zakah are evaluated on the basis of the registering value while it is greater than their market value, these assignments are to be subtracted from Zakah assets.

3. Assignments to meet approximated commitments due to others

* Standard accounting definition and evaluation:
These are commitments of a Company to others, but are not precisely determined, such as provisions for severance pay, leave, taxes and compensation.
These provisions are evaluated by accountants. Also, these are deemed the responsibility of the Establishment or Company, and they appear in the profit and loss statement.

* Evaluation and legal judgment:
These commitments must be estimated accurately without any exaggeration to avoid being considered secret reserves. They are deemed as debts due subtracted from the assets liable to Zakah. If any excess is found, the difference must be deducted. Also, if this expected-to-be-paid commitment includes any late interest penalty or the like, this interest is regarded as part of the debt due to be repaid according to the Islamic point of view. Hence, interest is not subtracted from the assets liable to Zakah and only the commitment to be paid is subtracted.

Calculating Zakah on Ownership Rights

* Standard accounting definition and evaluation:

Ownership rights represent the net rights of co-owners of an establishment, and the difference between the total sum of assets after subtracting the total sum of commitments and provisions. This can be expressed by the following formula:
Ownership rights = assets - [commitments and provisions]
Ownership rights include the following items:
1 . Capital
2 . Reserves
3 . Non-distributed profits

* Evaluation and legal judgment:
Ownership rights are termed net financial obligations. Jurists dealt with ownership rights in detail in books on Islamic Jurisprudence under the topic of 'Capital'.
Here, we are going to deal with ownership rights according to the standard accounting definition and evaluation, and the evaluation and legal judgment from the perspective of calculating Zakah.

1. Calculating Zakah on capitals

* Standard accounting definition and evaluation:
This is the amount of money invested by the shareholders in a joint-stock company. Each share represents a portion of the company's capital. The capital appears in terms of the original paid value.

* Evaluation and legal judgment:
The already paid capital is regarded as the property of the shareholders and appears in terms of its paid value. It is one of the not-presently-due long term sources of finance. From the religious point of view, it is not regarded as a debt due upon the company and is therefore, not subtracted from the assets liable to Zakah.

2. Calculating Zakah on reserve funds

* Standard accounting definition and evaluation:
These funds are amounts of money reserved from the distributable net profits that are distributable for supporting the company's status or for financing its future needs or to carry out regulatory governmental laws and the like. Some of these reserves are the following:
- Compulsory legal reserves.
- Optional regulatory reserves.
- Replacing assets reserves.
- Capital reserves.
Handling these reserves is governed by regulatory laws as well as familiar calculating principles and rules. They appear in the financial status list included under ownership rights.

*Evaluation and legal judgment:
Reserves are drawn from profits which are regarded as possessions of the shareholders. These are estimated in accordance with stated credits in the registers. These reserves are not subtracted from Zakah assets for they are part of the reserved or kept profits for the shareholders who own the establishment or the company. Hence, they are not regarded as commitments.

3. Calculating Zakah on the increase of share release

* Standard accounting definition and evaluation:
These represent amounts paid by the contracting shareholders to the releases of the new shares, and they represent the difference between the original value and the price of contracting and are dealt with in the same way as capital reserves. They are also regarded as part of the ownership rights.

* Evaluation and legal judgment:
These are treated as reserves, i.e., they are not subtracted from the assets liable to Zakah.

4. Calculation of Zakah on undistributed profits

* Standard accounting definition and evaluation:
Undistributed profits were earned by a company or firm within the previous fiscal year or more, but were not distributed among the shareholders for certain reasons. This was done with the consent of the general body of shareholders regarding the project of distributing the profits prepared by the company's board.

* Evaluation and legal judgment:
Profits that have not yet been distributed are deemed as rights of the shareholders and regarded as theirs. They are not to be subtracted from Zakah assets as they, in no way, differ in ownership from reserves.

5. Calculation of undistributed losses

* Standard accounting definition and evaluation:
These are undistributed losses that have been accrued during either the present period or other previous ones, but have not been distributed among the shareholders or partners for certain reasons.

* Evaluation and legal judgment:
Undistributed losses are regarded as a decrease in the rights of ownership. They do not affect the base of Zakah.

 

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