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TOPIC 9 Zakat Accounting for Islamic Financial Institutions

Meanings of Zakat General Meaning a compulsory levy imposed on the Muslims so as to take surplus money or wealth from the comparatively well-to-do members of the Muslim society and give it to the destitute and needed. Literal Meaning (Arabic word) 1. Growth or increase Giving Zakat will increase in prosperity in the world and religious merit in the hereafter. 2. Purity Purifies from sins (take from their property (sadaqah) in order to purify them (tuzakkhihim) Al-Quran 9:104.

Note: Both meanings have spiritual connotations.

The Role of Zakat Maududi: To ensure a decent living for the people and fulfill their basic needs is in the nature al-amru bil maaruf wa nahy an al-munkar (enjoining good and forbidding evil) Surah al-Maarij, verse 25: basic right for the poor in the wealth of the affluent Surah Al-Insan, verse 8: Allah SWT promises with distinction those who feed for the love of God the indigent, orphan and the capitve (slave) States responsibility: Ar-Rasul SAW declined the request of her daughter Fatimah who married Ali RA, to provide a servant By Allah I shall not grant this while Ahlu Suffah (a group of poor immigrants who slept in the mosque for lack of shelter) suffer from hunger and I do not find enough to feed them (Imam Ahmad Ibnu Hanbal Al-Musnad)

Wealth Subjected to Zakat (Traditional Wealth) Gold and Silver (including jewellery and money) Surah At-Taubah verse 35 Agriculture Produce (dates, wheat, etc.) Surah Al-Anam verse 141 Minerals (gold and silver) Surah al-Baqarah verse 267 Trade Assets Surah Al-Baqarah verse 267 Animals (camels, sheep, etc.) Surah An-nahl verses 5 7)

Wealth Subjected to Zakat (Modern Wealth) Based on Ijma, Qiyas and Ijtihad of Contemporary Ulama Income (e.g., salaries and wages) Financial Securities (e.g., shares and bonds) Islamic Financial insurances) Institutions (e.g., banks,

Principles of Zakat Accounting 1. Individual Right Ownership Wealth belongs to government or community or Waqf is not subjected to zakat 2. The valuation of Assets based on current or market value Show the most accurate and relevant value of assets Measure the net worth of the individual/company 3. Yearly principle Assets should be owned for one full year (haul) Zakat charged only once a year (except for agriculture produce)

Principles of Zakat Accounting 4. Ability to pay The aim of Nisab (minimum requirement) is to ensure Zakatable wealth is in excess of normal requirements. 5. Full Disclosure Zakat computation must be true and fair Zakat payers need to truthfully discloses all his/her financial facts In the case of companies, is the audited financial statement a reliable financial fact? 6. Objectivity (True and Fair View) Measurement must be objective and quantifiable Justice to both Zakat payers (who hold financial obligation) and Zakat beneficiaries (who are the rightful recipients of Zakat)

Zakat on Trade Wealth O you who believe! Give away some of the good things you have earned and some of what the earth produces (Al-Quran, Chapter 2 verse 267) Abu Dawud reports from Samura ibn Jundub; The Prophet SAW used to order us to pay Sadaqa (Zakat) from what we have for sale

AAOIFI Financial Accounting Standard No. 9 (Zakah) Why do we need Accounting Standard for Zakat? Consistency Comparability Compliance Scope of the Standard: 1. The determination of Zakah base (methods of assessment) 2. The measurement of items included in the Zakah base (methods of valuation)

3. Disclosure requirements in the Financial Statement

AAOIFI FAS 9 Effective beginning 1 Muharram 1420H or 1 January 1999 However, in many Muslim countries the standards served only as guidelines which they are not supposed to be complied with This is due to the required compliance with the respective countries Central Bank guidelines and by-laws.


Determination of Zakah Base Calendar Year 2.5% (Lunar of Hijrah) 2.5775 (Solar or Masihi)

Methods of Assessment Net Assets Method Net Invested Funds Methods


Difference between Masihi and Hijrah years


Jan 31 Feb 28 March 31 April 30 May 31 June 30 July 31 Aug 31 Sept 30 Oct 31 Nov 30 Dec 31 Total = 365


Muharram 30 Safar 29 Rabiul Awwal 30 Rabiul Akhir 29 Jamadil Awal 29 Jamadil Akhir 30 Rejab 29 Syaaban 30 Ramadhan 30 Syawal 29 Zulkaedah 30 Zulhijjah 29 Total = 354

Method of Zakat Measurement: Net Assets Method Assumptions: Urudh At-Tijarah or Net Trade (Current) Assets (Hanafi, Syafie Mazhab) Zakah Base: (Trade Assets/Current Assets) less (or minus) (Trade Liabilities/Current or Short-Term Liabilities)


Assets subjected to Zakat Assets acquired for trading (e.g., marketable securities, i.e., dealing and investment) Financing Assets (e.g., Mudarabah, Musharakah, Salam, etc.) Cash and cash equivalents Receivables (net of provision for doubtful debts)


Liabilities to be deducted Current or short term liabilities (payables or creditors, etc.) Equity of unrestricted investment accounts Equity owned by the government Equity owned by endowment funds (Waqf) Equity owned by charities Equity owned by non-profit organisations

Method of Zakat Measurement: Net Invested Funds Method Zakah Base

Net Equity (Invested Funds) minus (less) Fixed or Long Term Assets (Hanbali Mazhab)

Paid-up capital Reserves Retained Earnings Net Income (profit for the year) Long Term Liabilities (due more than a year)

Fixed Assets


Net Fixed Assets after depreciation (e.g., Land, Buildings, etc.) Long Term Investment Losses (if there is any)

Method of Assets Valuation for Zakat AAOIFI FAS 9: Market Value (market selling price or cash equivalent value) whenever possible Reasons: Zakat base should include the historical cost and any holding gains (or losses) To reflect the true value of the assets and the current financial position of the entity However, trade liabilities, long term liabilities, equity, and fixed assets are permissible to be valued at book value Differences in valuation will affect the assessment and adjustment of the differences in the valuation need to be provided

AAOIFI FAS 9: Disclosure Requirements Methods used for determining Zakat base and items included in the base The ruling of the Shariah Board of the Islamic Bank on issues related to Zakat that are not included in the standard Statement on whether or not the Islamic Bank as a holding company pays its share of Zakat obligation of its subsidiaries In the case the Islamic Bank does not pay Zakat, the amount of Zakat due should also be disclosed.

AAOIFI FAS 9: Disclosure Requirements Whether or not the Islamic bank collects and pay Zakat on behalf of the holders of the investment accounts and other accounts. Restrictions imposed by the Shariah Supervisory Board of the Islamic Bank in determining Zakat base. The disclosure requirements of FAS 1: General Presentation and Disclosure in the Financial Statements of Islamic Banks and Financial Institutions shall be observed.


Emerging Issues of Zakat on Trade Wealth Is a company or an IFI a legal entity to pay zakat? Incentive to pay? No tax rebate for corporate zakat Mixed ownership i.e. Muslim and Non-Muslim shareholders? Thus, (% shares ownership X Net Current Assets at year end) Is a conventional audited financial statement relevant for zakat measurement?


Zakat Obligations for Islamic Financial Institutions Obligations to pay should be charged directly to the shareholders and depositors Shareholders authorising the Islamic Banks to do so on their behalf Islamic Fiqh Academy recognised Zakat due to be paid by the enterprise as a corporate entity


Zakat Obligations for Islamic Financial Institutions Islamic Banks must pay Zakah when: - the law requires them to pay - required by its Charter or by-laws, and - when the general assembly (AGM) and shareholders has passed resolution require them to pay If the Islamic bank pay Zakah then the shareholders and depositors do not have to pay


MASB Technical Release i - 1

 The amount of zakat assessed shall be recognised as an expense and included in the income statement for the period in which it is incurred  Assessment one haul  Zakat on business = zakat rate x zakat base  The rate of zakat on business, as determined by National Fatwa Council, is 2.5% of zakat base  Zakat base net adjusted amount of zakat assets and liabilities from the business activities
 Adjusted working capital method  Adjusted growth method


Disclosure under MASBTr i-1

 Method used in the determination of zakat base  Its responsibility towards payment of zakat on business;

and  Major components of zakat

 Current zakat expense  Zakat payment  Zakat liability  Any adjustments recognised in the period for zakat of prior



MASB Tr-i 1 vs AAOIFIs FAS 9

MASB Tr-i 1 TrApplicable Measurement Business that pay zakat Same measurement bases used in the preparation of financial statements book value 2.5% AAOIFIs FAS 9 Islamic banks Cash equivalent value assets Book value liabilities and equities 2.5% - Hijriah year 2.5775% - Masehi year

Zakat rate