the impact of ifrs adoption on islamic financial institutions l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
The Impact of IFRS Adoption on Islamic Financial Institutions PowerPoint Presentation
Download Presentation
The Impact of IFRS Adoption on Islamic Financial Institutions

Loading in 2 Seconds...

play fullscreen
1 / 31

The Impact of IFRS Adoption on Islamic Financial Institutions - PowerPoint PPT Presentation


  • 864 Views
  • Uploaded on

The Impact of IFRS Adoption on Islamic Financial Institutions. 5 th IIUM International Accounting Conference (INTAC) 12-13 July 2011 Kuala Lumpur, Malaysia. Mohammad Faiz Azmi Chairman, Malaysian Accounting Standards Board (MASB). Agenda. Convergence with IFRS Role of AOSSG IF WG

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'The Impact of IFRS Adoption on Islamic Financial Institutions' - Mia_John


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
the impact of ifrs adoption on islamic financial institutions

The Impact of IFRS Adoption on Islamic Financial Institutions

5th IIUM International Accounting Conference (INTAC)

12-13 July 2011

Kuala Lumpur, Malaysia

Mohammad Faiz Azmi

Chairman, Malaysian Accounting Standards Board (MASB)

agenda
Agenda
  • Convergence with IFRS
  • Role of AOSSG IF WG
  • Using IFRS for Shariah-compliant transactions
  • MASB’s approach to accounting from an Islamic perspective
  • The impact to IFIs
  • Next steps
convergence with ifrs
Convergence with IFRS

2012

2010

2006

1997

1978

why ifrs
Why IFRS?
  • Accepted globally - IFRS used by more than 100 countries
  • Common language – reduced reporting costs; no need to reconcile accounts
  • Credibility of local market to foreign investors
  • Comparability across boundaries
  • Cross border listing
convergence in malaysia

Convergence with standards issued from 2006 onwards

Harmonisation

1997 - 2005

  • Standards:
  • Similar to IFRS
  • Guidance & other requirements added
  • Standards:
  • Word-for-word with IFRS
Convergence in Malaysia

In Malaysia, convergence with IFRS means FULL compliance with IFRS as a basis for financial reporting.

Through December 31, 2011Starting January 1, 2012

asian oceanian standard setters group aossg
Asian-Oceanian Standard-Setters Group (AOSSG)

Members comprised 24 standard setters:

Macao

Malaysia

Mongolia

Nepal

New Zealand

Pakistan

Philippines

Saudi Arabia

Singapore

Sri Lanka

Thailand

Uzbekistan

Vietnam

Australia

Brunei

Cambodia

China

Dubai

Hong Kong

India

Indonesia

Iraq

Japan

Kazakhstan

Korea

role of aossg islamic finance working group
Role of AOSSG Islamic Finance Working Group

Objective

Assists the AOSSG in providing input and feedback to the IASB on the adequacy and appropriateness of proposed and existing IFRSs to Islamic financial transactions and events.

Framework

Undertake to make recommendations within the framework of the IASB’s accounting standards.

aossg islamic finance working group
AOSSG Islamic Finance Working Group

Members

MASB (WG Leader), AASB (Australia), ICAP (Pakistan), SOCPA (Saudi Arabia), DFSA (Dubai), KASB (Korea), Ministry of Finance, China

Work done to date

AOSSG Research Paper: Financial Reporting Issues relating to Islamic Finance, October 2010.

Commented on IASB EDs on Revenue, Leases, Insurance Contracts, Hedge Accounting, Offsetting FA and FL, and FI: Impairment

Available at www.aossg.org

substance over form background and issue
Substance over formBackground and Issue
  • Background: IASB Conceptual Framework states that substance over form is an integral part of representing a transaction faithfully:
  • Faithful representation means that financial information represents the substance of an economic phenomenon rather than merely representing its legal form. (Par. BC3.26)
  • Issue: While conventional standard setters deem substance over form integral to financial reporting, there have been some reservations about its acceptability from an Islamic perspective.
    • Some believe that the application of substance over form would render a Shariah compliant transaction virtually indistinguishable from a comparable conventional transaction.
substance over form example
Substance over formExample
  • Example: IjarahMuntahiaBittamleek
    • During the Ijarah period, the lessee is only deemed to be renting.
    • There is also a promise (wa’ad) by the lessor to sell the item, and/or a promise by the lessee to purchase the item at the end of the Ijarah period.
    • At the end, a separate sale and purchase agreement is entered into.
  • Form over Substance Approach: The financial statements recognise two separate transactions:
    • Rental would be recognised throughout the Ijarah period.
    • A sale would be recognised when the aqadto transfer the Ijarah item is entered into.
  • Substance over Form Approach: The financial statements recognise one transaction:
    • Account for two transactions similarly to a ‘hire purchase’ agreement by combining both contracts into one.
probability criterion background and issue
Probability criterionBackground and Issue
  • Background: IASB Conceptual Framework calls for the recognition of assets and liabilities when it is probable that future economic benefit will flow to or from the entity:
      • The concept of probability is used… to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. (Par. 4.40)
    • IFRS’s also recognizes certain expenses when they are probable.
      • For example, proposed impairment guidance recognizes impairment when it is ‘expected’ (i.e., ‘probable’ to occur).
  • Issue: Is there any Shariah prohibition against recognising assets, liabilities, revenues and expenses based on when they are probable to occur?
probability criterion example
Probability criterionExample
  • Example: Mudarabah Profit Calculation
    • Mudarabah is a partnership agreement whereby the profits are shared between the partners at an agreed-upon rate.
    • In calculating profit, under the IASB’s proposed impairment model, impairment would be recognised when impairment is expected.
    • Would the use of an expected loss model ‘distort’ the profit that is shared by the partners? 
  • Probability Approach:
    • Impairment would impact profit when it is probable.
  • Incurred Approach:
    • Impairment could only impact profit when it is incurred.
time value of money background and issue
Time value of moneyBackground and Issue
  • Background: Many IASB Standards use the ‘time value of money’ concept. For example, under IAS 39, certain assets and liabilities are measured at amortised cost (recognising financing income or expense on a constant yield).
    • Loans and receivables… shall be measured at amortised cost using the effective interest method. (IAS 39, Par. 46)
  • Issue: Would it be inappropriate to reflect a time value of money in reporting an Islamic financial transaction, when no overt interest is charged or incurred in such transactions?
    • To some, it is unpalatable that an arrangement to purposefully avoid charging interest would result in the reporting of financing income anyway.
time value of money example
Time value of moneyExample
  • Example: Deferred Sales Contract
    • A sales contract where payment is deferred for a period of time
  • Time Value of Money Approach:
    • Under IAS 18, if the fair value of the asset transferred is less than the cash to be received, the difference is recognised as financing revenue.
  • Ignoring Time Value of Money Approach:
    • The entire amount of cash received (or to be received) would be accounted for as sales revenue.
    • The excess cash received over the fair value of the consideration transferred would be recorded as sales revenue, instead of financing income.
transaction specific issues
Transaction-specific issues

Recognising a financing effect

    • Recognition of profit in sales
    • De-recognition in sale and buy-back
    • Transaction fees

Profit sharing contracts

    • Profit Equalisation Reserve (PER)
    • Classification

Takaful accounting issues

  • Application of IFRS 4
  • Classification and measurement of qard
  • Presentation of financial statements
transaction specific issues19
Transaction-specific issues

Sukuk

    • Assets transferred to SPE
    • Sukuk valuation

Embedded Derivatives

    • Would profit rate cap give rise to an embedded derivative?

Ijarah

  • Accounting treatment for ijarah

Shariah related disclosures

  • Additional disclosures required?
history
History
  • Initially – wanted separate Islamic accounting standards.
  • Now: SOP i-1
    • MASB approved accounting standards apply, unless there is a clear Shariah prohibition.
  • Any additional guidance via Technical Releases (TR).
masb s islamic pronouncements
MASB’s Islamic pronouncements
  • SOP i-1, Financial Reporting from an Islamic Perspective
  • TR i-1, Accounting for Zakat
  • TR i-2, Ijarah
  • TR i-3, Presentation of Financial Statements of Islamic Financial Institutions
  • TR i-4, Shariah Compliant Sale Contracts

22

the impact to ifis in malaysia
The impact to IFIs in Malaysia

MINIMAL impact

  • MASB standards consistent with IAS/IFRS since 1978.
  • Previously, exclusions for:
    • “Islamic leases” in MASB 10 Leases.
    • “Transactions and events conducted on the basis of Islamic principles” in MASB 24 FI.
    • Since 2005, no exemptions for Islamic transactions/IFIs from FRS.
    • Re-confirmed by SOP i-1 in 2009.

24

our financial reporting framework milestones

IFRS ‘Stable Platform’

for 2005 established

IASC restructured to IASB

Our financial reporting framework milestones

MIA / MICPA

Harmonisation period

Convergence period

1978

2005

2006

2007

2008

2009

2010

2012

2004

2001

1997

Rename standards to FRS in line with IFRS

First adoption of IAS

FRS made identical to IFRS

Parliamentary Act established MASB

Announced convergence with IFRS in 2012

Convergence with IFRS

Introduce 2-sets of financial reporting standards

Issue SOP i-1 Financial Reporting from an Islamic Perspective

the impact outside of malaysia
The impact outside of Malaysia

Other jurisdictions

SIGNIFICANT (potentially)

- depending on how their current standards compare to IFRS

  • IFIs currently using AAOIFI
    • There will be substantial impact since their recognition and measurement may differ significantly
  • For IFIs not using AAOIFI
    • Need to assess differences between their current accounting guidance and IFRS

27

what can you do
What can you do?

What should educators do?

  • Learn and understand IFRS
  • Talk to the industry / practitioners / regulators
  • Tailor your research to industry needs
  • Keep up to date with changes

What should students do?

  • Question your teachers / professors
  • Get more involved in the debate!
  • Understand how IFRS applies to transactions
useful websites

30

Useful websites

30

  • IFRS Foundation & IASB www.ifrs.org
  • Asian-Oceanian Standard Setters Group www.aossg.org
  • Accounting & Auditing Organization for Islamic Financial Institutions www.aaoifi.com
  • FRF & MASB www.masb.org.my
thank you
Thank you

Disclaimer:

The views expressed in this presentation are those of the presenter. Official positions of the MASB on accounting matters are determined only after extensive due process and deliberation.