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ACCOUNTING FOR ISLAMIC FINANCIAL INSTITUTIONS
presented by En. Sulaiman Omar, AmIslamic Bank Berhad Pn. Hasleenda Onn, OCBC
FINANCIAL REPORTING ENVIRONMENT & FRAMEWORK FOR ISLAMIC FINANCIAL INSTITUTIONS
Definition and Purpose of Accounting
In 1996 the American Accounting Association defined accounting as: “…the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of that information” In 1975 they added that the purpose of the process was: “…to provide information which is potentially useful for making economic decisions and which, if provided, will enhance social welfare”
IRB Staff Public . analysing. recording. interpreting result of operation reporting & presenting financial position Documents Vouchers Ledgers Trial Balance Report (Mgmt) Profitability = Income – expenses Growth Liquidity Profitability Financial Statement = Balance Sheet = Income Statement = Stmt of Changes in Equity = Cash Flow Statement = Notes to the Accounts STAKEHOLDERS Management Board of Directors Security Analysts Investment Advisors Fund Managers Authorities – BNM. SC.ACCOUNTING a process of recognising. classifying and summarising business transactions measuring.
measurable in $$ terms Decision usefulness Maximisation of wealth of stakeholders .owners ≠ managers On-going concern .Traditional Model of Accounting Accounting entity .no perceivable time horizon Economic events .
. Accountability framework – the objective is to provide a fair system of information flow between the agent and the principal.Objectives of Financial Accounting and Reporting Provide information that is useful to present and potential investors and creditors and other users in making rationale decisions. Information should be comprehensible to those who have reasonable understanding of economic activities and are willing to study the information.
IRB Staff Public Managers .responsible for protecting the shareholders’ interest by vigilantly overseeing the company’s activities. profitability and prospects of their company Directors . need to be concerned with the financial condition. equity analysis .to ensure their own well-being and future earnings potential.thru restructuring the operations (mergers. investment advisors and fund managers . This demands an understanding and appreciation of financing and operating activities. acquisitions): estimated intrinsic values.Users of Financial Statement STAKEHOLDERS Management Board of Directors Security Analysts Investment Advisors Fund Managers Authorities – BNM. SC. Security analysts.
Public . The IRB applies tools of financial statement analysis to audit tax returns and check the reasonables of reported amounts.enquire knowledge on the performance. financial condition and profitability of the company.Users of Financial Statement STAKEHOLDERS Management Board of Directors Security Analysts Investment Advisors Fund Managers Authorities – BNM.Use analysis techniques in their supervisory and rate-determination roles.analyse the performance of the company. Staff . SC. IRB Staff Public Authorities . for investment purposes .
then a man and two women. so let him write. such as ye choose. more suitable as evidence. out of your own men. or weak or unable himself to dictate. in transactions involving future obligations in a fixed period of time. the other can remind him. whether it be small or big: it is juster in the sight of Allah.Accounting and Islam “ O ye who believe! When ye deal with each other. The witnesses should not refuse when they are called on (for evidence). And get two witnesses. it would be wickedness in you. let his guardian dictate faithfully. for witnesses. and if there are not two men. for it is Allah that teaches you. But take witnesses whenever ye make a commercial contract. and let neither scribe nor witness suffer harm. And Allah is well acquainted with all things. let not the scribe refuse to write: as Allah has taught him.” (Surah Al-Baqarah:282) . Let him who incurs the liability dictate. If ye do (such harm). So fear Allah. but let him fear his Lord Allah. Disdain not to reduce to writing (your contract) for a future period. and more convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on you if ye reduce it not to writing. and not diminish aught of what he owes. reduce them to writing let a scribe write down faithfully as between the parties. If the party liable is mentally deficient. so that if one of them errs.
Lessons from verse 282 Al-Baqarah The importance of proper recording Fear God in recording transactions (Islamic true and fair view) Justice in financial transactions (e.g. the rights of debtor and creditor) Islamic materiality concept Financial transactions require trustworthy witnesses Witnesses must be independence and protected by law Proper accounting to avoid doubts and disputes among human beings .
User Groups of Accounting for Islamic Banks Investors (potential and existing): lawful and equitable investment Creditors (potential and existing): lawful trade assets Regulators Shari'a Supervisory Board & Advisory Council (Shari'a compliance) Customers (lawful goods and services) Others who may be effected by the disclosure or non disclosure of information .
Objectives of Islamic Financial Accounting and Reporting Determine rights and obligations of all interested parties in accordance with the principles of Shari'a Subscribe to the safeguarding of the Islamic financial institution’s assets. its rights and the rights of others Subscribe to the enhancement of managerial and productive capabilities of Islamic financial institutions Report useful information to users. thus enabling them to make legitimate decisions in their dealings with Islamic banks .
measurement and disclosure of Islamic-based transactions . Companies Act 1965. applicable MASB accounting standard and International Accounting Standard (IAS) Lack of Shari'a consistency as each bank relied on Shari'a advisors of respective banks even with the supervision of the central banks Lack of comparability and consistency on the accounting treatment on recognition. it is under the purview of BNM through guidelines (GP8i). for example.Needs for Accounting Standard for Islamic Financial Institutions Islamic banking financial reporting practices of central banks regulation in respective of Muslim and non-Muslim countries In Malaysia.
efforts by MASB with the guidance of AAOIFI’s standards to develop Malaysian accounting standard for Islamic financial institutions .Needs for Accounting Standard for Islamic Financial Institutions Measurement and comparison financial performance of the banks Lack of sound regulation on accounting hinders the development of Islamic banking In Malaysia.
AAOIFI contributes significantly to the professional development for the industry. In addition. It was registered on 11 Ramadan 1411 H. formerly known as Financial Accounting Organization for Islamic Banks and Financial Institutions. was established in accordance with the Agreement of Association signed by Islamic financial institutions on 1 Safar. corresponding to 27 March 1991 in the State of Bahrain (Kingdom of Bahrain. 1410 H. and Shari’a standards for the international Islamic banking and finance industry. AAOIFI is responsible for developing accounting. It has its corporate office in Kingdom of Bahrain. now) as an International autonomous non-for-profit corporate body. auditing. governance. AAOIFI is supported by over 150 institutional members from around 40 countries. ethics.Accounting and Auditing Organizations of Islamic Financial Institutions (AAOIFI) AAOIFI. corresponding to 26 February 1990. . in Algeria.
on banking operations. In addition. 22 Accounting Standards. the publishing of books on general banking and finance knowledge. Governance Standards and 2 codes of ethics. prepares and issues Financial Accounting Standards (FASs) and Shari'a Standards (SSs) and their relevant exposure drafts through a system of due process and industry practitioners' consultations. 21 Shari'a Standards 4 . notably one -so far.Accounting and Auditing Organizations of Islamic Financial Institutions (AAOIFI) As an international standards setter. is sponsored by AAOIFI. AAOIFI develops. 5 Auditing Standards.
Auditing and Governance Standards Statement of Financial Accounting Objectives Concepts Financial Accounting Standards Presentation and Disclosure of Financial Statements of Islamic Banks Murabaha Financing Mudaraba Financing Musharaka Financing Profit Allocation Basis Financial Accounting Standards Investment Account Holders Salam Financing Ijarah Financing Zakah Istisna’ Financing Provisions and Reserves Presentation and Disclosure of Financial Statements of Islamic Insurance Companies .AAOIFI: Accounting.
AAOIFI: Accounting. Auditing and Governance Standards Auditing Standards Objectives and Principles of Auditing The Auditor’s Report Terms of Audit Engagement Governance Standards Shari'a Supervisory Board Shari'a Review Internal Shari'a Review Code of Ethics Code of Ethics for Accountants and Auditors of IFI New Financial Accounting Standards Investment Fund Disclosure Bases for Determining and Allocating Insurance Surplus (and Deficit) New Auditing Standards Audit Tests for Shari'a Compliance .
AAOIFI STRUCTURE .
The General Assembly is the supreme authority and convenes at least once a year.AAOIFI GENERAL ASSEMBLY The General Assembly is composed of all founding. Observer and supporting members have the right to participate in the meetings of the General Assembly but without a right to vote. . associate. supporting and observing members and regulatory and supervisory authorities.
monetary authorities. the chairman of the Standards Board shall have the casting vote. In case of a tie. etc). Islamic financial institutions Accounting and auditing firms whose professional work relates to Islamic financial institutions. The members of the Board of Trustees shall be elected from among the following categories.AAOIFI BOARD OF TRUSTEES The Board of Trustees shall be composed of twenty part-time members to be appointed by the General Assembly every five years and they shall continue in office until members of the succeeding Board are appointed. Shari'a Fiqh scholars Users of financial statements of Islamic financial institutions. The Standards Board meets at least twice every year and its resolutions are adopted by the majority of the votes of the members voting. . taking into account their geographical distribution: Regulatory and supervisory authorities (central banks.
the following: (1) Achieving harmonization and convergence in the concepts and application among the Shari’a supervisory boards of Islamic financial institutions to avoid contradiction or inconsistency between the fatwas and applications by these institutions. The powers of the Shari’a Board include. thereby enabling Islamic financial institutions to cope with the developments taking place in instruments and formulas in fields of finance. (2) Helping in the development of Shari’a approved instruments. investment and other banking services. . among others. thereby providing a pro-active role for the Shari’a supervisory boards of Islamic financial institutions and central banks. and Shari’a supervisory boards in central banks.AAOIFI SHARI'A BOARD The Shari’a Board is composed of not more than twenty members to be appointed by the Board of Trustees for a fouryear term from among fiqh scholars who represent Shari’a supervisory boards in the Islamic financial institutions that are members of AAOIFI.
auditing and code of ethics and related statements throughout the various stages of the due process. or to settle divergent points of view. or to act as an arbitrator.AAOIFI SHARI'A BOARD (3) Examining any inquiries referred to the Shari’a Board from Islamic financial institutions or from their Shari’a supervisory boards. (4) Reviewing the standards which AAOIFI issues in accounting. to ensure that these issues are in compliance with the rules and principles of Islamic Shari’a. either to give the Shari’a opinion in matters requiring collective Ijtihad (reasoning). .
. including preparers. users. make up the new framework for financial reporting in Malaysia.MASB The Malaysian Accounting Standards Board (MASB) is established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. The MASB. regulators and the accountancy profession. together with the Financial Reporting Foundation (FRF). This new framework comprises an independent standard-setting structure with representation from all relevant parties in the standard-setting process.
seek the view of the FRF in relation to new and existing standards. and changes to proposed standards. determine scope and application of accounting standards. issue statements of principles for financial reporting.MASB The functions and powers of the MASB as provided under the Act are to: issue new accounting standards as approved accounting standards and to review. revise or adopt existing accounting standards as approved accounting standards. conduct public consultation as necessary. . and to perform such other function as the Minister of Finance may prescribe. sponsor or undertake development of possible accounting standards. develop a conceptual framework for the purpose of evaluating proposed accounting standards. statement of principles. make such changes to proposed accounting standards as considered necessary.
practical implications as well as practices in other major jurisdictions. Against this backdrop. it is formed by the MASB to debate on emerging issues of significance to the accounting profession. A Working Group is chaired by a member of the MASB and comprises a project manager. The Working Group plays an important role in the standards due process. each is responsible for different projects. representatives from the accounting profession.MASB Working Group The Malaysian Accounting Standards Board (MASB) has established 60 Working Groups to date. Islamic: Working Group 36 . academia as well as regulatory authorities. giving due regard to the statutory and regulatory reporting requirements. The Working Group is responsible for reviewing and undertaking detailed studies of assigned project. commerce.
Presentation of Financial Statements of Islamic Financial Institutions (Chairman: Y. Alias. Encik Syed Ghazali Wafa S.my/masbstd_FRSi-1. Abdul Samad Hj. Adwam Wafa) WG 36 was responsible for developing MASB i-12004 Presentation of Financial Statements of Islamic Financial Institutions. The MASB will continue to develop the Islamic Accounting Standards in the near future and has established a working structure to ensure a smooth implementation of this new and challenging area.Bhg. Datuk Dr. Project Managers: Dr.WG 36 WG 36. This is the first Islamic accounting standard ever issued by MASB.htm .org. Syed Musa Syed Jaafar Al-Habshi. http://www. This Standard is to streamline the accounting procedures of Islamic Financial Institutions and to ensure comparability of financial performance of Islamic banks and conventional banks that participate in Islamic Banking Scheme.masb. The Standard was renamed FRS i-12004 with effect from 1 January 2005.
AAOIFI? Inadequacy of IASs and FASs (by AAOIFI) IAS General principles Shariah issues AAOIFI Shariah issues General principle Format Practicality Legal requirement .Why not IAS.
Aim Provide guidance in the preparation of a complete set of Financial Statements Harmonise accounting practices where Shari'a allows alternatives Bridge gap where IASs and AAOIFI standards have not been addresses adequately Ensure comparability of performance Promote growth in Islamic transactions .
Due Process .
General Presentation & Disclosure Requirements in the Financial Statements of Islamic Financial Institutions: The Case of MASBi-1 (FRSi-1) .
as well as conventional banks that provide Islamic banking services. and disclosure of Islamic-based transactions complicates or hinders attempt to compare financial performance among banks or between periods for individual banks. It has become increasingly evident that in the long run the lack of dedicated standards will also hamper the development of Islamic investment vehicles as well as a robust Islamic capital market. The current practice has raised a number of serious concerns. Islamic banks and other Islamic financial institutions. . Islamic banking financial reporting practices have been under the purview of the Central Bank of Malaysia (Bank Negara Malaysia) as well as the Companies Act 1965 and applicable Financial Reporting Standards. as well as the introduction by the government of a structural framework and a set of facilitative measures to nurture a healthy development of the industry. measurement. In the absence of a comprehensive set of accounting standards. Hitherto. have relied heavily on the prevailing guidelines issued by the Bank Negara Malaysia and on Shariah rulings issued by Shariah advisors appointed by the respective banks.The Need for Islamic Accounting Standards IN1. Islamic banking operations in Malaysia have been in existence for nearly two decades and have experienced rapid growth due to wider understanding and public acceptance. The absence of a proper set of accounting standards for the recognition.
Scope Mandatory: IFIs that conduct Islamic banking business Mandatory: IFIs that lodge report to BNM Mandatory: Conventional banks with IBS Encouraged: Other Islamic institutions or those other than IFIs that offer Islamic banking scheme .
General Presentation & Disclosure Requirements in the Financial Statements of Islamic Financial Institutions: The Case of MASBi-1 (FRSi-1) Objective The objective of this Standard is to lay down the basis for the presentation and disclosure of financial statements of Islamic financial institutions that conduct Islamic banking activities. and disclosure of specific Islamic-based transactions and events will be dealt with in other MASB Islamic Standards. It also prescribes minimum disclosure requirements. measurement. . This Standard sets out the overall considerations for the presentation and disclosure of the financial statements specific to these institutions in order to ensure comparability of these statements with those in previous periods and with those of other Islamic financial institutions. The recognition. and basis of the content of financial statements to ensure conformity with Shariah requirements. this Standard provides guidelines for the structure. In addition.
Islamic Financial Institutions??? .
Islamic Financial Institutions Islamic banks Islamic windows of Commercial Banks Development banks/ Cooperative banks Finance companies Investment banks Discount houses that carry out Islamic banking business or Islamic financial business .
Shariah Requirements Refers to Shariah principles and rules issued by SAC Shariah rulings promulgated by the Shariah Supervisory Board of IFIs In cases of differing opinions. the rulings promulgated by SAC shall prevail .
Purpose of Financial Statements To provide information on: Financial position Financial performance Cash flows of IFIs Portrays management’s stewardship Assessing the degree of Shariah compliance .
Review Annual Report?? .
Responsibility of Financial Statements Board of directors or the equivalent governing body of an IFIs is responsible for the preparation and presentation of its financial statements. .
Components of Financial Statements Balance Sheet Income Statement Statement of Changes in Equity Cash Flow Statement Accounting policies. explanatory notes and appendices .
and Reliable in that they: Represent faithfully the results and financial position of the IFI Neutral Prudent Complete in all material respects In the absence of specific FRS. management uses its judgement in developing accounting policy. . consider Shariah requirements.Accounting Policies Management should develop policies to ensure that the FS provide information that is: Relevant to decision making needs of users.
. Material uncertainties that may cast doubt upon the IFI’s ability to continue as going concern should be disclosed.Going Concern FS should be prepared on a going concern basis unless management either intends to liquidate the IFI or to cease trading.
.Accrual Basis of Accounting IFI should prepare its FS. except for cash flow info. under the accrual basis of accounting unless otherwise by SAC.
Consistency of Presentation Presentation and classification of items in FS should be retained from one period to the next unless: can demonstrate that change appropriate presentation. . or results in a more a change is required by FRS. or regulation.
Structure & Content Identification of FS Reporting period Timeliness Balance Sheet Income Statement Statement of Changes in Equity Cash Flow Statement Notes to FS .
.Identification of FS FS should be clearly identified Display prominently: Name of the IFI Whether individual of group FS are presented The BS date or the period covered by the FS: IFI is encouraged to include the Muslim calendar date Reporting currencies The level of precision used in the presentation of figures in the FS.
cash flows & related notes are not comparable. changes in equity. the IFI should disclose: Reason for a period other than one year being used. .Reporting Period FS should be presented at least annually In cases when IFI’s BS date changes & the annual FS are presented for a period longer or shorter than a year. and Fact that those comparative amounts for the income statements (IS).
for e.Timeliness An IFI should issue its FS within six months of the balance sheet date More specific deadlines.g. set by BNM for licensed institutions .
Balance Sheet & Income Statement BS should include the IFI’s assets. liabilities and equity IS should include income. expenses and net profit/ loss for the period .
Balance Sheet (Illustration) .
Balance Sheet (Illustration) .
Income Statement (Illustration) .
Income Statement (Illustration) .
& the total of these items Cumulative effect of changes in accounting policies & the correction of errors Cash flow statement reports cash flows during the period classified by operating. investing and financing activities . as required by other FRSs is recognised directly in equity. gain or loss which.Statement of Changes in Equity & Cash Flow Statement A statement of changes is equity should show: Net profit or loss for the period Each item of income & expense.
Statement of Changes in Equity (Illustration) .
Statement of Changes in Equity (Illustration) .
Cash Flow Statement (Illustration)
Cash Flow Statement (Illustration)
Notes to FS
Structure Presentation of Accounting Policies Additional Disclosures in FS Unusual Supervisory Restrictions Shariah Advisor / Board & Zakat Obligations Prohibited Earnings & Expenditure Concentrations of Asset Risks
Concentration & Distribution of Investment Accounts Distribution of Assets Commitments & Contingencies Changes in Accounting Estimates, Errors & Accounting Policies Profit Distribution Policy Related Party Disclosures Specific Investment Accounts
Case Study: Overview of the Financial Statements of Islamic Banks Malaysia and Foreign-based Islamic Banks .
Case Study Approach Overview of the Financial Statements of Islamic banks operating in 4 Islamic financial centers – Kuala Lumpur. Bahrain. Dubai and Kuwait Focus on 2 main areas : Presentation of financial statements Accounting standards and disclosures .
6 billion Shareholders funds of RM880 million Operations in commercial banking.my .bankislam. brokerage and fund management First and leading Islamic bank in Malaysia www. listed on Bursa Malaysia) Financial statements for year ended 30 June 2006 Total assets of RM14. Takaful.Background of Samples BIMB Holdings Berhad (Kuala Lumpur based.com.
net .) Shamil Bank (Bahrain based.shamilbank. Pakistan and Switzerland www.Background of samples (cont. Qatar.9 billion Main operations – fund management.7 billion Shareholders funds of USD353 million Funds under management of USD1. investment banking and financing Operations in Bahrain. Yemen. listed in Bahrain) Financial statements for year ended 31 December 2006 Total assets of USD1.
fund management.gfhouse. Qatar.5 billion Main operation – financing infrastructure projects. subsidiary in commercial banking Projects in Bahrain.5 billion Shareholders funds of USD668 million Funds under management of USD1.com .) Gulf Finance House (Bahrain based. listed in Bahrain and Kuwait) Financial statements for year ended 31 December 2006 Total assets of USD1. Dubai and Jordan www.Background of samples (cont.
db.Background of samples (cont. real estate investment also in Egypt. listed in Dubai) Financial statements for year ended 31 December 2006 Total assets of AED64. real estate investment and development Main operations in UAE.4 billion Shareholders funds of AED8.8 billion Main operations – financing and investing. banking subsidiary in Sudan. Ireland. Lebanon www.) Dubai Islamic Bank (based in Dubai.ae .
com .3 billion Shareholders funds of KD702 million Main operations of financing (corporate and retail). investment.kfh. leasing and fund management www. listed in Kuwait) Financial statements for year ended 31 December 2006 Total assets of KD6.Background of samples (cont.) Kuwait Finance House (based in Kuwait.
Accounting Standards BIMB (Malaysia) • FRS based (‘old’ FRS. and • IFRS (include IAS 39) . exclude IAS 39) including local FRSi • BNM Guidelines. especially GP8i and GP3 Shamil Bank (Bahrain) • AAOFII based Dubai Islamic Bank (Dubai) • IFRS based (include adoption of IAS 32 and 39) • Sharia rules and principles • Kuwait Finance House (Kuwait) • IFRS based (include IAS 39) • Regulations of Central Bank of Kuwait Gulf Finance House (Bahrain) • AAOFII based.
FINANCIAL SECTOR TALENT ENRICHMENT PROGRAMME Thank you .