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    ACFrOgA0nbo1 HqM3TzzeM8zX3JSEF8TV BUmQD8MXydGm aQZtMg6bussvXo1CxYyLr66kqsrPoLa0ABXOlDQb4xwXKlrGF8wM - LA5RpAeXVdLqqR2ApCRj - h7UkKhnh3YOsYlPUO5YPE 6en8r

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    of 9
    Introduction 104 2 — ~ Financial Ae ve js found that his event orve neiet as changed, Wahi, “ evidence is OU A ig enterprises, iL may be aceepeaty, Ali concept is exten’ ise would continue in Operation jy 9” to peopl assume that an enterPT and until there is an indication the Bukhari jreseeable fiture unless “A ricern has ceased, ay Ap ite ability to continue as a BONS — 7, QUALITATIVE CHARACTERISTICS OF FINANCIAy cons STATEMENTS on According to Financial Reporting from an Islamic Perspective ‘To be issued by MASB, qualitative ¢l « s are atuributes thar makir make the information provided in fin ncial statements usefyy when to users. The four principal qualitative characteristics are them understandability, relevance, reliability, and comparability and corre they have their own sub-characteristics. Constraints as well as subje cost-benefit analysis in balancing between relevance and deck reliability are also important. dese perr 7.1 Understandability ecor may tot An essential quality of the information provided in financial statements is that it is readily understandable by users. For this 713 purpose, users are assumed to have a reasonable knowledge of business and economic ae activities and acc o 4 willing d accounting and a ae, ff study the information with reasonable diligence. ni ee about complex matters that should be economic d vancral statements because of its relevance to the “decision-making needs Of users should’ pat be excluded merel : ly on the groun at i i in mers to undead, st may be to iil fo The Prophet according to their abil Muslims to address people re Prophets companions reinforce ths an ie sayings of the ' relates something ree ene Pleased with him) sai: “No oe ; Puts some of them int ftnah ie ae do not understand, except thal ‘ discord)” (Sahih Muslim). , Financual Accounting: and Reporting for Iam tanh a 3 “Alt (nay Allah be pleased yw: ‘a 1 “«p, ae ented as with him) said: “Relate knowledge Bukhari). 1 of understanding...” (Sahih ale Applying the above sayings to fin appear that the concept of consistent with Iskumic beliefs, ancial reporting, it would Understandability would be 7.2 Relevance Yo be useful, information must be relevant to the decision making needs of users. Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present, or future events or confirming, or correcting, their past evaluations. rect Tlowever, relevance is subjective. Information that may influence one user group's decisions may not influence anothers. For example, an item described as ‘finance income’, when disaggregated into permissible and non-permissible income, may influence the economic decision of a Muslim user, while a non-Muslim user may be indifferent to the disaggregation. Thus, what is relevant to the Muslim may be irrelevant to the non-Muslim: 7.3 Materiality he relevance of information is affected by its nature and materiality. To be useful, the information provided should be material. In some cases, the nature of information alone is sufficient to determine its relevance. For example, the reporting of a new segment may affect the assessment of the risks and opportunities facing the entity irrespective of the materiality of the results achieved by the new segment in the reporting period. oo In other cases, both the nature and materiality are important; for example, the amounts of inventories held in each of the main categories that are appropriate to the business. Information is material if its omi sion or mistatement could influence the economic decisions of users taken on the basis of the financial statements. e nature of z From an Islamic perspective. te BATT al even if the size of the Iter ic verse: m is q make it mater a nt as stated in the Qur‘ani rd wed, Wes insignitic unt” a Moreover, in figh. there is a legal maxim that : 5 a mix of the permissible and the prohibite becomes prohibited. This would appear to sug small amounts of prohibited items may be material the maxim appears to be a precautionary measure Tr a ruling. For example, the maxim is applied in mixture of dhadiha, i.e. Islamically slaughtered. dhabika meats. The mix of permissible and prohibited m renders the whole prohibited for Muslim consum; Conversely, the prohibition does not apply to a mixture of si! and other threads. Although Muslim men are prohibited from wearing silk clothing, a garment may be deemed permi it is made of a mixture of silk and other threads such that th silk content does not exceed a prescribed proportion. The Shari‘ah Advisory Council of the Securities Commission has developed benchmarks to determine the permissibility of various activities and items. For financial reporting purposes, an entity may not need to Teport some items below a certain threshold. Conversely, there mav be instances where an entity may be required to disclose an item regardless of the size of the item. 7A Reliability To be useful seful, information must al i hi . ee st also be reliable. In: a ie cen of reliability when it is free from m: formation and bias and can be depen aterial error lepended upon b truth fai . “ pon by users to re vnnetiah aly Information that may be resent bat cliable in’ natur y elevant but nature or representation may be potentially misleading. Reliabiliny informa NB: Reliability means that users cg rmation presented. In ses can depend on the - ome certainty of an item or am Instances, the validity or hount cannot be determined with sal Accounting, and Reporting for Mamie ty Finan absolute accuracy and the use of estin nates become necessary. nates ‘The Shariah permits the and judgments may use of persud : ‘ asive evide . absence ot ‘onclusive evidence. Where pers ide ne in the been used, it ma eg iCTe persuasive evidence has disclosure on U ay be appropriate to include additional di : 16 assumptions underlying the estimates. and judgments. ying the estimates and 1.5 Faithful Representation To be reliable, information must represent faithfully all transactions and other events. For example, a balance seek should represent faithfully the transactions and other aroh that result in assets, liabilities and equity of the entity at the meets recognition criteria. Under the reporting date wh Framework, faithful representation means that there is a close correspondence between the information presented and the events that occurred. Generally, this actual transactions and when it has characteristic is deemed to be satisfied ated the economic reality of a transaction or event. demons legal form of the transaction Little regard may be given to the or event. However, in figh, one of the five foundational legal maxims is al-umiir bi-magasidiha, which means that acts are ‘judged by their goals and purposes. The economic reality of a transaction cannot be ascertained without reference to its legal form, and a. There is interconnectedness between the economic m of a transaction, both of which contribute of the actual transaction or event. Thus, n from an Islamic perspective would f both the economic reality and legal vice vers reality and legal for towards a portrayal faithful representatio require the presentation © form of a transaction or event. 7.6 Substance over Form ansactions and other accounted for and nd economic present faithfully t hat they are their substance 4! If information is to Te events, it is mecessaTy uJ presented in accordance to _—-—dh— sl lhlhlhehttet~™ ON x for Islamic Financial Institu Introduction to Aeconnting. for Islamic Fmnan tal Pnstitutions 16 Ae reality and not merely their legal form. In financial reporting, the tha over form entails presenting the he characteristic of substancé : an asaction or event on the face of the economic reality of a 0 ent ont © of t balance sheet and income statement. There is no Shari‘ah objection to recognizing a financial transaction. However, it is not favorable to disregard the legal form. Current practices of Islamic banks in Malaysia follow the substance over form concept. In the case of yarah, benefits accrue to the lessees (the customers) but ownership remains with the lessors (Islamic banks). By nature, normally, leasing assets are fixed assets and they are required to provide the depreciation. However, they are treated as current a sets in the records of Islamic banks in Malaysia. One of the main reasons for not treating leased assets as fixed assets is that if Islamic tion, it will reduce bank profitability. banks provide deprecia However, AAOIFI suggests classifying these as fixed assets. Hence, the role of disclosure is important here. Regardless of where it is stated as fixed or current, detailed information should be disclosed in the notes to ensure that users are not misled and to reduce information asymmetry. The transparency and disclosure of accounting information are required of Islamic banks and this can be inferred from the Qur'anic verse (al-Baqarah, 2:282) quoted earlier. This can be summarized that from the Islamic perspective, the information that represents Shari‘ah compliant transaction requires to display both economic reality and legal form. Explanation of the legal form should be provided in the notes to the financial statement. 7.7 Prudence Prudence is the inclusion of a degree of caution in the exercise of the Judgments needed in making the estimates required under conditions of uncerta inty. This concept is to ensure that Islamic banks do not overstate assets and incomes and understate liabilities and expenses. According to this concept, assets and incomes can be recognized when they are realized while liabilities and expenses are recognized even when these amano decrees nd Reporting for Islamic gre expected 10 incUT with Certainty predence concept is not allowed if bank wks try ty to create hidden XCESSIVE. Provisi hi ai et provisions. This may resul fat base. “The important role of fair val eae air value ter emphasis and thus the concept of Howeve: wever, the use of the peserves and a as been given a PU of prudence becomes Tess tportaunt, ness 7.8 Complet Completeness means inc lusion of s of all the neces i cessary information for faithful representations of the tran: pisclosure of complete information is essential to maintain the reliability of the accounting information Rae Nisclostire should be within the bounds of materi Mey andl eet fanivent writing on financial reporting fom the stam perspective is silent on the acceptability of completene However, the Board believes that completeness in recording Shariah compliant transactions would include the display of information on both the economic reality and the component contracts ofa series of closely inter-related SharT“ah compliant tions of Islamic banks. transac 7.9 Comparability able to compare the financial statements of an Users must be trends in its financial entity thr ‘ough time in order to identify erformance. Users must also be able to compare ts of different entines in order to financial position, performance and Hence, the measurement and of like transactions and other position and p' the financial statement evaluate their relative changes in financial position. display of the financial effect events must be carried out in a consistent way: cas An important implication of the qualitative characteristic of comparability is that users will be informed of the al policies. employed in the preparation of the ee statements, any changes iD those policies such changes. It is not appropriate for an en accounting in the same manner for a transaction oF © tity to continue other event and the etleets of r Islamic Financial Institutions Accounting fo Introduction to is not in keeping with the qualitative fared jability. It is also if the policy adopte cee characteristics of relevance leave its accounting policies ™ jate for an entity ve . . — a i inappropriate ore relevant and reliable alternatives exist, nmi a Si sers wis! re the finance osition, user i to compa Pp “ Since is ce and changes in financial position of an entity ove: Q r ancial statements show time, it is important that the financial Se ; i t ece erlods. , corresponding information for the preceding p ee consistency in applying accounting measurements, i 1 Ic e i a her and disclosure methods from one period to another is important. 7.10 Timeliness ‘Timeliness is important because if there is any delay in the reporting of information, it may lose _ its relevance. Management may need to balance the relative advantages of tinely reporting and the provision of reliable information, To provide information on a timely basis it may often be necessary {0 report before all aspects of a transaction or other event are known, thus impairing reliability, Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but less relevant to users to make decisions. There is limited discussion on timeliness of financial reporting from an Islamic Perspective. Nevertheless, where it is necessary to report before all aspects of a transaction or event is known, some degree of estimation and judgment may be used, as Shari‘ah principles permit the use of persuasive evidence in the absence of conclusive evidence. 7.11 Balance between Benefits and Costs ine eee derived from information should exceed the cost of py git. The eyah,.,: 7 : me brovi ing The evaluation of benefits and costs is ever, sul stantially a jud 1 ' hoy 7 a sMental proces: roviding: information to users, tie renee leis an wane ting Hor 10 users, “ Tule is that the cost of providing rimati aa ra "8 that information should not exceed the benefit to . Or er, C i wever, in the evaluation of benefits and costs, it Financial Accounting and Reporting for Islamic Bank emt should be born in mind that from an Islamic p i ’! erspective, ‘users’ is not limited to investors a ors and cred society as a whole. litors, but extends to practice, a balancing, In ¢, a balancing, or trade-off, between qualitative characteristics is often necessary, Generally, the aim is t achieve an ¢ rate ba ne. chars colin achieve an appropriate balance among the characteristics in order to meet the objectiv ( ; ¢ of financial statements. The relative importance of the various characteristics in different cases is a matter of professional judgment. Where appropriate the basis for such professional judgment should be disclosed. , : 7.12 Balance between Qualitative Characteristics In practice, a balancing or trade-off between qualitative characteristics is sometimes necessary. The aim is to achieve an appropriate balance among the characteristics in order to mee! the objective of financial statements. Professional judgment i necessary in assessing the relative importance of the characteristics for different cases. The disclosing on what judgment has been decided for any particular transaction or event is encouraged. 7.13 True and Fair View or Fair Presentation Financial statements need to reflect the true and fair view of a bank’s_ performance and changes in financial positions of banks. It is expected that observing qualitative characteristics and appropriate accounting standards will result in the true and fair view of presenting information. From the Islamic perspective, the true and fair view of an entity 1S not achieved by presenting only the financial position, Pesccoa an changes in financ 1 positions of banks. A oe istic presentation of banks may extend into non-financia coe Islam is very much concerned with the fair Pree ani rights and obligations, as evidenced by the sala Ques ie verse: “O ye who believe! Stand out firmly for jus! ie eapenger Allah, even as against yourselves, or your parents, or y 5 Introduction to Accounting for Islamic Financial Institutions. “t both” (al. whether it be (against) rich or poor: for Allah can best protect both” (al. Nisa’, 4:135). sande Those

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