Agenda paper 7.1 Islamic Finance : Work done in 2014 [Malaysia, Lead Country, AOSSG Islamic Finance Working Group] 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
A study of 132 financial statements from 31 countries STUDY OF FINANCIAL STATEMENTS OF ISLAMIC FINANCIAL INSTITUTIONS 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 Country Qty. Statement of compliance Malaysia (10), Saudi (10) & UAE (10) Albania (1), Australia (1), Kazakhstan (1), Mauritius* (1), Sudan (1), South Africa (1) & Switzerland (1) 30 IFRS 7 IFRS *Qualified audit opinion for departure from IAS 17. Bahrain (2), Kuwait (2) & Turkey (2) Qatar Bosnia Kuwait UK TOTAL 61 6 IFRS 5 IFRS 1 IFRS as translated into Bosnian 8 IFRS as adopted by the State of Kuwait 4 IFRS as adopted by the EU 6
14% complied with Local GAAP w/o differential requirements for Islamic transactions 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 7
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 offbalance 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 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. AAOIFI requirements 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 straightline, 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 Notable findings finance income 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
A discussion on applying IFRS 9 to Islamic transactions IASB OUTREACH EVENT ON ISLAMIC FINANCE & IFRS 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
Should a state-administered charitable endowment apply IFRS, IFRS for SMEs, IPSAS or another standard? MASB S PROJECT ON ACCOUNTING FOR WAQF 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 Yes No under its management? SIRC has control as sole trustee. Users of SIRC s FS would have more information on waqf assets. 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