Islamic Finance : Work done in 2014
[Malaysia, Lead Country, AOSSG Islamic Finance Working Group]
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Agenda paper 7.1
Key activities in 2014
Study of financial statements of Islamic
financial institutions (IFIs) around the world
IASB Outreach Event on Islamic Finance &
IFRS
MASB project on accounting for waqf
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STUDY OF FINANCIAL STATEMENTS OF
ISLAMIC FINANCIAL INSTITUTIONS
A study of 132 financial statements from 31 countries
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About the study Sample size: 132 IFIs, 31 countries.
Population: Top Islamic Financial Institutions, The
Banker, November 2013.
Basis of selection: (1) Financial statements in English;
(2) Max 10 from each country.
Objective is to ascertain:
Applicable financial reporting framework
Lessor accounting for ijarah with transfer of ownership
Classification of investment accounts
Recognition & measurement of finance income
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Financial reporting framework
46% – IFRS or IFRS as adopted by the
jurisdiction.
34% – Local GAAP
14% without differential requirements for
Islamic transactions.
20% with differential requirements for
Islamic transactions.
18% – AAOIFI.
2% – unspecified. 5
46% complied with IFRS
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Country Qty. Statement of compliance
Malaysia (10), Saudi (10) & UAE (10) 30 IFRS
Albania (1), Australia (1), Kazakhstan (1), Mauritius* (1), Sudan (1), South Africa (1) & Switzerland (1)
7 IFRS *Qualified audit opinion for departure from IAS 17.
Bahrain (2), Kuwait (2) & Turkey (2) 6 IFRS
Qatar 5 IFRS
Bosnia 1 IFRS as translated into Bosnian
Kuwait 8 IFRS as adopted by the State of Kuwait
UK 4 IFRS as adopted by the EU
TOTAL 61
14% complied with Local GAAP w/o differential
requirements for Islamic transactions
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Country Qty. Statement of compliance
Bangladesh 7 Bangladesh Financial Reporting Standards
Brunei 1 Generally accepted accounting principles in Brunei
India 1 Indian Accounting Standards (IND AS)
Iran 2 Iranian Accounting Standards
Philippines 1 Philippines Financial Reporting Standards
Sri Lanka 2 Sri Lankan Financial Reporting Standards
Thailand 1 Thailand Financial Reporting Standards
Turkey 2 Turkish Financial Reporting Standards
USA 2 US GAAP
TOTAL 19
20% complied with Local GAAP with differential
requirements for Islamic transactions
Country Qty Statement of compliance
Bangladesh 3 BFRS, central bank directives and AAOIFI (or to the extent the first two does not conflict with AAOIFI)
Egypt 2 Egyptian Accounting Standards (including ijarah law)
Indonesia 10 Indonesian FAS including PSAK Syariah
Pakistan 10 Companies Ordinance, Islamic Financial Accounting Standards (IFAS)
Yemen 1 Accounting standards for IFIs, IFRS and central bank directives.
TOTAL 26
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18% complied with AAOIFI
Country Qty Statement of compliance
Bahrain 8 AAOIFI Financial Accounting Standards
Jordan 3 AAOIFI Financial Accounting Standards
Lebanon 1 AAOIFI Financial Accounting Standards
Oman 1 AAOIFI Financial Accounting Standards
Qatar 5 AAOIFI Financial Accounting Standards
Sudan 6 AAOIFI Financial Accounting Standards
TOTAL 24
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Lessor accounting
87 samples were lessors in ijarah with
arrangement to transfer ownership
– 14% recognised IAS 17 finance lease
receivable
– 45% recognised IAS 39/IFRS 9 financial
asset at amortised cost
– 37% recognised AAOIFI FAS No. 8 leased
asset subject to depreciation
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Lessor accounting
Departures from standards complied
– Departure from IFRS: The sample from
Mauritius stated compliance with IFRS but
treated ijarah in accordance with AAOIFI
FAS No.8 as directed by a central bank
guideline.
– Departure from AAOIFI: Four samples from
Qatar stated compliance with AAOIFI but
recognised ijarah receivables at
amortised cost.
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Classification of customer
investment accounts
Two types, as perceived by Islamic
finance industry:
– Unrestricted (URIA): IFI has the authority to
determine how fund is invested.
– Restricted (RIA): customer provides
parameters on how IFI may invest the
fund.
Three possible classifications:
– Liability, quasi-equity or off balance sheet
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Classification of customer
investment accounts
Many samples did not differentiate
between
– deposits and investment accounts
– URIA and RIA.
Study looked at amounts due to
customers based on Mudarabah.
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Classification of customer investment accounts
79 samples had amounts due to customers
based on Mudarabah
50 or 63% - financial liability.
13 or 16% - intermediary element between
liability and equity.
12 or 15% - intermediary element and off-
balance sheet item.
3 or 4% - financial liability and off balance sheet
item.
1 or 1% - off balance sheet item.
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Recognition and measurement of
finance income
Returns from Islamic transactions take
the form of profit, rental, fee or gift.
Study concentrated on income from
two much-used contracts
– Ijarah with arrangement to transfer
ownership
– Murabahah (sale with mark-up)
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Recognition and measurement of finance income
IFRS requirements AAOIFI requirements
IFRS 9 - effective profit method IAS 17 - ‘on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease’.
FAS No. 8 – ijarah revenue shall be allocated proportionately FAS No.20 – deferred payment sale revenue is recognised at the point of contracting. FAS No. 20 – deferred payment sale profit is recognised on an accrual basis and proportionately allocated
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Recognition and measurement of
finance income
Ijarah income: Of the 87 samples that
had ijarah that transferred ownership,
– 61% used effective interest method
– 9% used proportional allocation
– 14% used ‘time-apportioned’ basis.
– 16% used other methods: 1 straight-
line, 3 cash, 5 accruals, 5 unspecified.
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Recognition and measurement of
finance income
111 samples had finance income from
murabahah.
– 64 or 57% used the effective interest
method
– 11 or 10% used proportional allocation
– 12 or 11% used ‘time-apportioned’ basis
– 24 or 22% used other methods – 3 used
straight line; 3 used cash basis, 17 used
accrual basis and 1 used internal rate of
return
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Recognition and measurement of
finance income
Notable findings – What is ‘time-apportioned’ basis? Used in
both IFRS and AAOIFI-compliant FS.
– A Malaysian sample recognised finance
lease income using the straight-line
method.
– A South African sample recognised
murabahah income using the straight-line
or reducing balance method.
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Conclusions
Need to improve comparability.
– IFIs applied a variety of reporting
frameworks.
Differing interpretations of
requirements in a standard – IFIs applying the same set of standards used
different terms to describe their income
recognition method, e.g. Are ‘proportional
allocation' and ‘time-apportioned’ the same as
‘straight-line’ or the same as ‘constant yield’?
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IASB OUTREACH EVENT ON
ISLAMIC FINANCE & IFRS
A discussion on applying IFRS 9 to Islamic transactions
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About the event
Kuala Lumpur, 5 September 2014
Chaired by Mr. Wayne Upton.
To discuss IASB staff paper: Issues in the
Application of IFRS 9 to Islamic
Finance.
Paper discussed 3 main topics:
– Which IFRS?
– Principal and interest
– Measurement and presentation of
finance income 22
Which IFRS?
Would financing based on sale or
construction (istisna’) fall within IFRS 15 or
IFRS 9?
– Sale-based financing as carried out by banks
unlikely to fall within IFRS 15.
– Construction-based financing unlikely to fall
within IFRS 15 if construction risks are transferred in
the contract with customer.
• But, the contract may fall within IFRS 15 if the bank
mitigates construction risk by buying insurance or through hedging.
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Principal and interest
Do cash flows in Islamic finance represent
payment of principal and interest (finance
income) as described in IFRS 9?
– The definition of interest in IFRS 9 (2014)
was broad enough to encompass returns
on most Islamic finance transactions.
– In general, there is no objection to
recognising Islamic finance income on
constant effective yield basis.
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Measurement & presentation of
finance income
The IASB staff paper noted IFIs used
different terms to describe the method
of income recognition.
– Noted that ‘time-apportioned’ method
was used by some.
– Participants indicated there is no
objection to using a constant effective
yield method for income recognition.
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Conclucion
To issue non-binding recommendations.
– Mr Upton proposed that the IASB
Consultative Group on Shariah-compliant
Instruments and Transactions issue
recommended solutions to the matters
discussed.
– The recommendations would not form
part of IFRS and would not be binding.
– Participants generally agreed.
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MASB’S PROJECT ON
ACCOUNTING FOR WAQF
Should a state-administered charitable endowment apply
IFRS, IFRS for SMEs, IPSAS or another standard?
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About Waqf in Malaysia
Comparable to a charitable endowment,
but must comply with Islamic rules.
Malaysian law mandates the respective
state Islamic religious council (SIRC) as the
sole trustee for waqf in a state.
The SIRC is a statutory body established by a
state government.
Most waqf are real property. As land values
rise, accounting for waqf becomes more
important.
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Is waqf a reporting entity?
Should waqf assets and liabilities form
part of a SIRC’s financial statements?
Is waqf a reporting entity that should
present its own separate financial
statements?
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Which financial reporting standards should apply to waqf?
IFRS – Public accountability is present as it
benefits the public.
IFRS for SMEs – Full IFRS is too onerous.
Accrual basis IPSAS – The SIRC, as a
government statutory body should apply
IPSAS; and so should the waqf it
manages.
Charity accounting standards – Waqf is
charitable in nature.
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Should a SIRC consolidate waqf under its management?
Yes
– SIRC has control as sole trustee.
– Users of SIRC’s FS would have more
information on waqf assets.
No
– SIRC’s powers over waqf is merely
regulatory
– SIRC does not benefit from waqf (unless
the law or the donor allows it to).
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MASB welcomes your views
Please address your views and
comments to :
– Ms. Tan Bee Leng at
– Ms. Mas Sukmawati Abu Bakar at
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