Islamic Finance : Work done in 2014

[Malaysia, Lead Country, AOSSG Islamic Finance Working Group]

1

Agenda paper 7.1

Key activities in 2014

Study of financial statements of Islamic

financial institutions (IFIs) around the world

IASB Outreach Event on Islamic Finance &

IFRS

MASB project on accounting for waqf

2

STUDY OF FINANCIAL STATEMENTS OF

ISLAMIC FINANCIAL INSTITUTIONS

A study of 132 financial statements from 31 countries

3

About the study Sample size: 132 IFIs, 31 countries.

Population: Top Islamic Financial Institutions, The

Banker, November 2013.

Basis of selection: (1) Financial statements in English;

(2) Max 10 from each country.

Objective is to ascertain:

Applicable financial reporting framework

Lessor accounting for ijarah with transfer of ownership

Classification of investment accounts

Recognition & measurement of finance income

4

Financial reporting framework

46% – IFRS or IFRS as adopted by the

jurisdiction.

34% – Local GAAP

14% without differential requirements for

Islamic transactions.

20% with differential requirements for

Islamic transactions.

18% – AAOIFI.

2% – unspecified. 5

46% complied with IFRS

6

Country Qty. Statement of compliance

Malaysia (10), Saudi (10) & UAE (10) 30 IFRS

Albania (1), Australia (1), Kazakhstan (1), Mauritius* (1), Sudan (1), South Africa (1) & Switzerland (1)

7 IFRS *Qualified audit opinion for departure from IAS 17.

Bahrain (2), Kuwait (2) & Turkey (2) 6 IFRS

Qatar 5 IFRS

Bosnia 1 IFRS as translated into Bosnian

Kuwait 8 IFRS as adopted by the State of Kuwait

UK 4 IFRS as adopted by the EU

TOTAL 61

14% complied with Local GAAP w/o differential

requirements for Islamic transactions

7

Country Qty. Statement of compliance

Bangladesh 7 Bangladesh Financial Reporting Standards

Brunei 1 Generally accepted accounting principles in Brunei

India 1 Indian Accounting Standards (IND AS)

Iran 2 Iranian Accounting Standards

Philippines 1 Philippines Financial Reporting Standards

Sri Lanka 2 Sri Lankan Financial Reporting Standards

Thailand 1 Thailand Financial Reporting Standards

Turkey 2 Turkish Financial Reporting Standards

USA 2 US GAAP

TOTAL 19

20% complied with Local GAAP with differential

requirements for Islamic transactions

Country Qty Statement of compliance

Bangladesh 3 BFRS, central bank directives and AAOIFI (or to the extent the first two does not conflict with AAOIFI)

Egypt 2 Egyptian Accounting Standards (including ijarah law)

Indonesia 10 Indonesian FAS including PSAK Syariah

Pakistan 10 Companies Ordinance, Islamic Financial Accounting Standards (IFAS)

Yemen 1 Accounting standards for IFIs, IFRS and central bank directives.

TOTAL 26

8

18% complied with AAOIFI

Country Qty Statement of compliance

Bahrain 8 AAOIFI Financial Accounting Standards

Jordan 3 AAOIFI Financial Accounting Standards

Lebanon 1 AAOIFI Financial Accounting Standards

Oman 1 AAOIFI Financial Accounting Standards

Qatar 5 AAOIFI Financial Accounting Standards

Sudan 6 AAOIFI Financial Accounting Standards

TOTAL 24

9

Lessor accounting

87 samples were lessors in ijarah with

arrangement to transfer ownership

– 14% recognised IAS 17 finance lease

receivable

– 45% recognised IAS 39/IFRS 9 financial

asset at amortised cost

– 37% recognised AAOIFI FAS No. 8 leased

asset subject to depreciation

10

Lessor accounting

Departures from standards complied

– Departure from IFRS: The sample from

Mauritius stated compliance with IFRS but

treated ijarah in accordance with AAOIFI

FAS No.8 as directed by a central bank

guideline.

– Departure from AAOIFI: Four samples from

Qatar stated compliance with AAOIFI but

recognised ijarah receivables at

amortised cost.

11

Classification of customer

investment accounts

Two types, as perceived by Islamic

finance industry:

– Unrestricted (URIA): IFI has the authority to

determine how fund is invested.

– Restricted (RIA): customer provides

parameters on how IFI may invest the

fund.

Three possible classifications:

– Liability, quasi-equity or off balance sheet

12

Classification of customer

investment accounts

Many samples did not differentiate

between

– deposits and investment accounts

– URIA and RIA.

Study looked at amounts due to

customers based on Mudarabah.

13

Classification of customer investment accounts

79 samples had amounts due to customers

based on Mudarabah

50 or 63% - financial liability.

13 or 16% - intermediary element between

liability and equity.

12 or 15% - intermediary element and off-

balance sheet item.

3 or 4% - financial liability and off balance sheet

item.

1 or 1% - off balance sheet item.

14

Recognition and measurement of

finance income

Returns from Islamic transactions take

the form of profit, rental, fee or gift.

Study concentrated on income from

two much-used contracts

– Ijarah with arrangement to transfer

ownership

– Murabahah (sale with mark-up)

15

Recognition and measurement of finance income

IFRS requirements AAOIFI requirements

IFRS 9 - effective profit method IAS 17 - ‘on a pattern reflecting a constant periodic rate of return on the lessor’s net investment in the finance lease’.

FAS No. 8 – ijarah revenue shall be allocated proportionately FAS No.20 – deferred payment sale revenue is recognised at the point of contracting. FAS No. 20 – deferred payment sale profit is recognised on an accrual basis and proportionately allocated

16

Recognition and measurement of

finance income

Ijarah income: Of the 87 samples that

had ijarah that transferred ownership,

– 61% used effective interest method

– 9% used proportional allocation

– 14% used ‘time-apportioned’ basis.

– 16% used other methods: 1 straight-

line, 3 cash, 5 accruals, 5 unspecified.

17

Recognition and measurement of

finance income

111 samples had finance income from

murabahah.

– 64 or 57% used the effective interest

method

– 11 or 10% used proportional allocation

– 12 or 11% used ‘time-apportioned’ basis

– 24 or 22% used other methods – 3 used

straight line; 3 used cash basis, 17 used

accrual basis and 1 used internal rate of

return

18

Recognition and measurement of

finance income

Notable findings – What is ‘time-apportioned’ basis? Used in

both IFRS and AAOIFI-compliant FS.

– A Malaysian sample recognised finance

lease income using the straight-line

method.

– A South African sample recognised

murabahah income using the straight-line

or reducing balance method.

19

Conclusions

Need to improve comparability.

– IFIs applied a variety of reporting

frameworks.

Differing interpretations of

requirements in a standard – IFIs applying the same set of standards used

different terms to describe their income

recognition method, e.g. Are ‘proportional

allocation' and ‘time-apportioned’ the same as

‘straight-line’ or the same as ‘constant yield’?

20

IASB OUTREACH EVENT ON

ISLAMIC FINANCE & IFRS

A discussion on applying IFRS 9 to Islamic transactions

21

About the event

Kuala Lumpur, 5 September 2014

Chaired by Mr. Wayne Upton.

To discuss IASB staff paper: Issues in the

Application of IFRS 9 to Islamic

Finance.

Paper discussed 3 main topics:

– Which IFRS?

– Principal and interest

– Measurement and presentation of

finance income 22

Which IFRS?

Would financing based on sale or

construction (istisna’) fall within IFRS 15 or

IFRS 9?

– Sale-based financing as carried out by banks

unlikely to fall within IFRS 15.

– Construction-based financing unlikely to fall

within IFRS 15 if construction risks are transferred in

the contract with customer.

• But, the contract may fall within IFRS 15 if the bank

mitigates construction risk by buying insurance or through hedging.

23

Principal and interest

Do cash flows in Islamic finance represent

payment of principal and interest (finance

income) as described in IFRS 9?

– The definition of interest in IFRS 9 (2014)

was broad enough to encompass returns

on most Islamic finance transactions.

– In general, there is no objection to

recognising Islamic finance income on

constant effective yield basis.

24

Measurement & presentation of

finance income

The IASB staff paper noted IFIs used

different terms to describe the method

of income recognition.

– Noted that ‘time-apportioned’ method

was used by some.

– Participants indicated there is no

objection to using a constant effective

yield method for income recognition.

25

Conclucion

To issue non-binding recommendations.

– Mr Upton proposed that the IASB

Consultative Group on Shariah-compliant

Instruments and Transactions issue

recommended solutions to the matters

discussed.

– The recommendations would not form

part of IFRS and would not be binding.

– Participants generally agreed.

26

MASB’S PROJECT ON

ACCOUNTING FOR WAQF

Should a state-administered charitable endowment apply

IFRS, IFRS for SMEs, IPSAS or another standard?

27

About Waqf in Malaysia

Comparable to a charitable endowment,

but must comply with Islamic rules.

Malaysian law mandates the respective

state Islamic religious council (SIRC) as the

sole trustee for waqf in a state.

The SIRC is a statutory body established by a

state government.

Most waqf are real property. As land values

rise, accounting for waqf becomes more

important.

28

Is waqf a reporting entity?

Should waqf assets and liabilities form

part of a SIRC’s financial statements?

Is waqf a reporting entity that should

present its own separate financial

statements?

29

Which financial reporting standards should apply to waqf?

IFRS – Public accountability is present as it

benefits the public.

IFRS for SMEs – Full IFRS is too onerous.

Accrual basis IPSAS – The SIRC, as a

government statutory body should apply

IPSAS; and so should the waqf it

manages.

Charity accounting standards – Waqf is

charitable in nature.

30

Should a SIRC consolidate waqf under its management?

Yes

– SIRC has control as sole trustee.

– Users of SIRC’s FS would have more

information on waqf assets.

No

– SIRC’s powers over waqf is merely

regulatory

– SIRC does not benefit from waqf (unless

the law or the donor allows it to).

31

MASB welcomes your views

Please address your views and

comments to :

– Ms. Tan Bee Leng at

beeleng@masb.org.my or

– Ms. Mas Sukmawati Abu Bakar at

mas@masb.org.my

32

THANK YOU

33