CHAPTER FOUR

FINANCIAL REPORTING FOR ISLAMIC

FINANCIAL INSTITUITIONS:

The Case of AAOIFI and MASB

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 Introduction: The need for
Generally Accounting Standards
 Over the last 20 years there has
been increasing interest in enhancing
the harmonization of accounting and
financial reporting by Islamic banks.

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 What is Int. Accounting
Harmonization?
 Accounting harmonization is the
process of bridging international
accounting standards across
countries regardless of the cultural
and political difference with the aim
to provide accountability in term of
financial statement presentation and
disclosures to the users and
stakeholders.
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Supervisory authorities in countries in
which Islamic banks operate have
taken various approaches:
1- Look directly to international
accounting standards as their national
standards or
2- Develop national standards based
primarily on international accounting
standards.
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 AAOIFI has been established as a
private standard setting body in
early 1990s to disseminate
accounting and auditing standards
for Islamic financial institutions
internationally.

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 This Chapter
 This chapter will provide an overview
of AAOIFI FAS1 and MASB FRSi-1
(currently MASB TRi-3) to present
the financial reporting requirements
relevant to Islamic financial
institutions.

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AAOIFI Financial Accounting
Standard No. 1

General Presentation and

Disclosure in the Financial
Statements of Islamic Financial
Institutions

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 Main categories of Islamic
financial statements
FAS1. specifies the complete set of financial
statement (similar to the conventional) for
IFIs:
 Statement of financial position
 Statement of income
 Statement of cash flow
 Statement of retained earning / or
statement of changes in owners’ equity.
 Notes/plocies to financial statements.

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 Main categories of Islamic
financial statements
Three Additional statements by FAS1 are
include:
1) Statement of changes in restricted
investment.
2) Statement of sources & uses of funds in the
Zakah and charity fund (zakat statement)
3) Statement of sources and uses of funds in
the Qard hasan fund (Qard statement).

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 Main categories of Islamic
financial statements
Other additional requirement to disclose:
 The role of shariah advisory board in
supervising the bank’s activities (authority
regard bye-laws and actual practise).
 Institutions responsibility towards zakah
management.
 Earning and activities prohibited by
Shariah and its treatment and disposals.

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Statement of financial position:
Definitions
Owners’ equity:
 It is the amount remaining at the date of

the statement of financial position, from

the Islamic bank’s assets after deducting
the bank’s liabilities and equity of
unrestricted investments.
 Prohibited earnings if any, must also be

deducted

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Statement of financial position:
Assets Disclosure
 Cash and cash equivalent
 Receivables ( Murabaha, Salam,
Istisna’a, etc)
 Mudarabah financing
 Musharakah financing
 Investment in other entities

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Statement of financial position:
Assets Disclosure (continued)
 Inventories
 Investment in real estate
 Assets acquired for leasing
 Other investments (disclosure of their
types)
 Fixed assets (disclosure of depreciation
for significant asset types )
 Other assets

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Statement of financial position:
Liability Disclosure
 Deposits of other banks
 Salam Payable
 Istisna’a Payable
 Declared but undistributed profits
 Zakat and taxes payable
 Other accounts payable

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 Statement of financial position:
Unrestricted investment accounts:
Disclosure
 Method used to allocate profit/loss
between the bank and unrestricted
investment account holders
 Returns of each type of investment
accounts and their rate of return
 Assets jointly financed by the Islamic bank
and unrestricted investment account
holders and those exclusively financed by
the bank
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 Income statement :
Definitions/Recognition

Net income (net loss):

 The net increase (decrease) in owners’
equity
 Results from revenues, expenses, gains,
losses, after allocating the return on
unrestricted investment accounts for the
period
 It is the result of all on-going profit
oriented operations of the bank and other
events and circumstances

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 Income statement: Disclosure
 Period covered by the income statement.
 Revenues and gains from investments
 (-)Expenses and losses from investments
 (=) Income (loss) from investments
 (-) Share of unrestricted investment account
holders in income (loss) from investments
before the bank’s share as a Mudarib

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 Income statement : Disclosure
(continued)
 (+)The bank’s share in unrestricted investment
income as a Mudarib
 (+) The bank’s share in restricted investment
profit as a Mudarib
 (+)The bank’s fixed fee as an investment agent
for restricted investment
 (+/-) Other revenues, expenses, gains and losses
 (-) General and administrative expenses
 (=) Net income (loss) before Zakat and taxes
 (-) Zakat and taxes ( separate disclosures)
 (=) Net income (loss)

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 Statement of Cash Flows -
Disclosure
 Period covered by the statement
 Cash flows from operations,
investing activities and cash flows
from financing activities
 Net increase (decrease) in cash and
cash equivalent
 Balance of cash and cash equivalent
(beginning and end)

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Financial statement for changes
in restricted investments
 Restricted investments are not assets of
the Islamic bank and should not be
reflected in the bank’s statement of
financial position
 The bank does not have the right to use or
dispose of these investments except within
the conditions of the contract between the
bank and holders of these accounts
 The statement must show deposits and
withdrawals by holders of restricted
investments as of a given date
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 Financial statement for changes
in restricted investments
Disclosure:
 The period covered by the statement
should be disclosed.
 The statement should segregate restricted
investments by source of financing.
 Nature of contractual relationship between
bank and owners of restricted investments
– Mudarib / agent
 Rights and obligations associated with each
type of investment account or investment
portfolio
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 Statement of sources and uses of
funds in the Zakah
and Charity Fund:
 Zakat: A fixed obligation calculated by

reference to net assets that have

appreciated or have the capacity to
appreciate over a specific period of
time except for assets acquired for
consumption or used in production
 Zakat should be based on the

company’s net assets, and the total

amount be divided between owners.
 Bank as an agent of Zakat

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 Statement of sources and uses of
funds in the Zakat
and Charity Fund:
 Disclosure
 The period covered by the statement
 Bank’s responsibility for the payment of
Zakat on behalf of owners of
unrestricted investment accounts and
their equivalents
 Payments and uses of funds during the
period and available funds at the end of
the period.
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Statement of Sources and Uses of
Funds in the Qard Fund
 The period covered by the statement
 Balances of qard outstanding and
funds available – beginning
 Amounts and sources of funds
contributed to the fund
 Amount and uses of funds
 Balances of qard outstanding and
funds available – end

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 Other treatments

 Changes in accounting policies

 Changes in non-routine accounting
estimates
 Correction of an error in prior period
financial statements

END

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