Depreciation on Fixed Assets should be Covered by Rentier

Answered according to Shafi'i Fiqh by Darul Iftaa Jordan
Is it permissible to deduct the amount of depreciation on fixed assets from the agent`s/Mudhaarib`s share in the profit of a partnership contract/Mudhaarabah contract?

All perfect praise be to Allah, Lord of all Creations, and may His peace and blessings be upon our Master Mohammad and upon all his folks and companions.

From the perspective of accounting, depreciation is the systematic reduction in the recorded cost of a fixed asset. According to this definition, reduction in the cost of a fixed asset isn`t a loss since not every reduction is a loss, but every loss is a reduction. Therefore, reduction caused by depreciation isn`t a loss because the establishment has been generating revenue in return. Actual depreciation of an asset is calculated upon selling that asset i.e. it is the difference between the asset`s cost and the price for which it was sold. As the establishment is still functioning, it is unlikely that the assets will be sold in order for actual depreciation to be calculated. Therefore, other methods of accounting should be used to achieve that end.

In 1413 AH, the Second Al-Baraka Symposium on Islamic Economics issued a resolution concerning deduction against the depreciation on a fixed asset, and it read as follows: "If the amount deducted against the depreciation was meant to guarantee a certain level of profit, then it is permissible to take it from the overall profit of the establishment prior to its division between the two parties of the Mudhaaraba contract. However, if it was meant to protect the capital{Fixed assets}, then it should be deducted only from the retier`s share since deduction from the overall profit makes the agent/Mudhaarib share the loss in capital, and this is unlawful according to Islamic Sharia."

In conclusion, the retier should cover the depreciation of the fixed assets from his share in the profit since this isn`t a loss, as clarified earlier, and it is unlawful to make the agent/Mudahaarib cover it or even a portion of it. And Allah knows best.

This answer was collected from the official government Iftaa Department of Jordan.

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