Accounitng for Salam and Parallel Salam

8/3/2019 Accounitng for Salam and Parallel Salam

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ACCOUNTING FOR SALAM ANDPARALLEL SALAM


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DEFINITIONS

Salam

Purchase of a commodity for deferreddelivery in exchange for immediate payment

according to specified conditions or sale of acommodity for deferred delivery in exchangefor immediate payment.

Al-Muslam fihi

The commodity to be delivered.


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DEFINITIONS

Al-Muslam ileihi

The seller

Al-Muslam

The purchaser

Ras-almal Capital (cost) paid (in cash, kind or benefit)

in a Salam contract i.e price.


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DEFINITIONS

Parallel Salam

A Salam contract whereby al-muslam ileihidepends, for executing his obligation, on

receiving what is due to him-in his capacityas al-muslam-from a sale in a previousSalam contract, without making theexecution of the second Salam contract

dependent on the execution of the first one.


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SALAM INITIAL RECOGNITION

Salam financing is recognized when thecapital of Salam is paid to Seller or madeavailable to him.

Parallel Salam is recognized when the Bankreceives the capital.

Initial recognition is made at the amount ofcash paid or at fair value of the asset, ifcapital is provided in kind.


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SALAM DISCLOSURES AFTERINITIAL RECOGNITION

Salam financing transactions are presentedas Salam Financing in financial statements.

Parallel Salam transactions are presented asliability under the head Parallel Salam inthe financial statements.

Commodity received against Salam isrecorded as an asset at historical cost.


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ISLAMIC BANKCommodityCommodityCustomer 2nd CustomerCommodityCommodity

SALAM ACCOUNTING TREATMENTS

SALAMCommodity having worth Rs. 12 M

purchased at Rs. 11 M with deferred

delivery of 1 month Rs. 1 M is the

expected profit of the Bank

PARALLEL SALAM

Same Commodity sold at Rs. 11.5 M

with deferred delivery of 1 month. Rs.

0.5 M is the expense of the Bank

Payment recorded as Salam FinancingAmount received recorded as Parallel Salam

Liability

Difference between the Salam price and the Market price or the Parallel Salam price is

recognised as Salam profit / expense


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SALAM SUBSEQUENT MEASUREMENT

At the end of each financial period, theSalam financing and parallel Salam liabilityare measured same as in initial

measurement.

If the delivery of commodity is not probablein full or in part or its value will decline, the

Islamic Bank will make provision of theamount of estimated deficit.


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SALAM SUBSEQUENT MEASUREMENT

Commodity acquired through Salam shall bemeasured at lower of historical cost or cashequivalent value.

If cash equivalent value is lower, thedifference shall be recognized as loss inIncome statement.


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SALAM PROFIT AND LOSSDETERMINATION

Salam profit is recognised when the goodsacquired under Salam are sold in themarket.

Note: A few scholars allow in case of certainbanks that whenever the delivery isreceived, if it is expected that the

commodity can be sold in profit, the profitmay be spread over the period betweendelivery sale.


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SALAM PROFIT AND LOSSDETERMINATION

Upon delivery of commodity in ParallelSalam transaction, difference of the amountpaid by client and cost of commodity shall be

recognized as profit or loss.


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Failure to receive commodity on due date:

If delivery is extended, the book valueshall remain as it is. If Salam contract iscancelled and capital is not repaid theamount shall be recognized as areceivable due from the client.

SALAM CHANGES IN QUANTITY, QUALITYOR PRICE OF COMMODITY


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Failure to receive commodity due to clientsmisconduct

If Salam contract is cancelled and clientdoes not repay the capital, the amountshall be recognized as a receivable duefrom the client. Securities pledged will

be realized to recover the receivable andany excess will be refunded.



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Receipt of commodity ofdifferent quality in Salam

Salam Finance Rs. 5 M

Market value of commodity Rs. 5 M

Record at book value Rs. 5 M

Equal to contracted value Rs. 5 M

The difference of Rs. 1 M is loss

Market value of commodity Rs. 4 M

Equal to contracted value Rs. 5 M

is not

Then

is

Then

Failure to receive commodity on due

date

Amount Rs. 5 M shall be recognized as a receivable due from the client.



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SAMPLE ACCOUNTING ENTRIES FOR SALAM

1 Advance paid to customer againstSalam

Debit Credit

Advance against Salam (B/S Asset Side) 100

Cash / DD (B/S Liability Side) 100

2 Item received from the customer

Purchases (P/L)/ Inventory (B/S AssetSide)

100

Advance against Salam (B/S) 100

3 Termination of Salam contract due tonon delivery of item

Receivable from customer (B/S) 100Advance a ainst Salam B/S 100


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4 Receipts of amount from customeragainst Parallel Salam

Debit Credit

Cash / DD (B/S Asset Side) 120

Parallel Salam (B/S Liability Side) 120

5 Delivery of Item against ParallelSalam

Parallel Salam (B/S Liability Side) 120

Purchases (P/L)/ Inventory (B/S Asset Side) 100

Parallel Salam profit (P/L) 20


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6 Revenue and Profit recognition (whengoods are sold directly or by agent)

Debit Credit

Cash / Receivable (B/S) 120

Salam Sales (P/) 120

(Diff. between Salam Purchase andSales is the Profit)

7 Settlement of Receivable Early

TerminationCash(B/S Asset Side) 100

Receivable from customer (grossamount)(B/S Asset Side)

100

Accounitng for Salam and Parallel Salam

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