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Agenda-E-2. Financial Reporting Issues relating to Islamic Finance. An overview of the Paper prepared for the 2 nd AOSSG Meeting. 2 nd Meeting of the Asian- Oceanian Standard-setters Group Wednesday, 29 th September 2010 Akihabara Convention Hall Tokyo, Japan.

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an overview of the paper prepared for the 2 nd aossg meeting

Agenda-E-2

Financial Reporting Issues relating to Islamic Finance

An overview of the Paper prepared for the 2nd AOSSG Meeting

2nd Meeting of the Asian-Oceanian Standard-setters Group

Wednesday, 29th September 2010

Akihabara Convention Hall

Tokyo, Japan

Ms Mas Sukmawati Abu Bakar

Associate Director, Islamic Research, Malaysian Accounting Standards Board

part i introduction
Part I: Introduction
  • What is Islamic finance?
  • Some statistics
  • Why should it be on AOSSG’s agenda?
what is islamic finance
What is Islamic finance?
  • Conventional finance may have Shariah-prohibited elements
  • Shariah compliant alternatives developed
  • Use of trade contracts, that date to (or pre-date) early Islam c. 600 AD – Bai’, Ijarah, Shirkah
  • But accompanied by other arrangements, e.g. wa’d
  • Economically, similar to conventional financing

Financing alternatives that comply with Islamic religious law

Based on trade contracts, rather than straight lending

May be arranged to be economically similar to conventional financing

[See Part I, paragraphs 1-12 of the Paper.]

slide4

2002 - Islamic Financial Services Board (IFSB), was established.

Islamic Bank of Britain, Britain’s first Shariah-compliant bank opens in London.

Establishment of Mitghamir Bank in Egypt.

Establishment of Pilgrimage Fund for haj pilgrimages in Malaysia.

Pakistan, Iran and Sudan announce transformation of financial systems to comply with Shariah.

1960s 1970s 1980s 1990s 2000 – to date

Establishment of the first commercial Islamic bank, Dubai Islamic Bank.

Establishment of Islamic Development Bank.

Pakistan, Bahrain and Malaysia began to promote Islamic banking system.

World’s first takaful company was established.

1990 - AAOIFI was established.

1999 - Dow Jones Islamic Index was introduced.

FTSE Index of Shariah-compatible stocks were developed.

Al-Madina Fund was the first Islamic equity fund established in London.

World’s first global sukuk was launched by Guthrie Berhad.

2010 - Germany’s first Islamic bank, a unit of Kureyt Turk Bank of Turkey, opens its doors in March.

2010 – ISDA/IIFM master agreement announced in March.

Modern Islamic finance

statistics
Statistics

Sources:

(1) & (2) ‘The Banker’s Top 500 Islamic Financial Institutions Survey shows the Growth in Islamic Finance’, RIBH: Le Journal de la Finance Islamique. Available at: http://ribh.wordpress.com/2009/10/28/top-500-islamic-financial-institutions-2/

(3) ‘Islamic finance set to cross $1 trillion: Moody’s’, Reuters, 14 June 2010. Available at: http://www.reuters.com/article/idUSLDE65D19720100614

(4) ‘UAE: Global Islamic Banks Assets to touch US$4 trillion by 2020’, CIBAFI, 24 May 2010. Available at: http://www.cibafi.org/newscenter/english/Details.aspx?Id=8362&Cat=0

statistics cont d
Statistics (cont’d)

Top 10 Countries by Value of Shariah-compliant Assets, 2009

Source: The Banker, Top 500 Islamic Financial Institutions, November 2009, p.4

statistics cont d1
Statistics (cont’d)

Source:

(1) Assets of the largest 1000 banks in 2009 taken from Banking 2010, IFSL Research, February 2010. Available at: http://www.thecityuk.com/media/2372/IFSL_Banking_2010.pdf

(2) Assets of the largest 500 Islamic banks in 2009 taken from ‘The Banker’s Top 500 Islamic Financial Institutions Survey shows the Growth in Islamic Finance’,RIBH: Le Journal de la Finance Islamique. Available at: http://ribh.wordpress.com/2009/10/28/top-500-islamic-financial-institutions-2/

how does it concern aossg
How does it concern AOSSG?
  • 62% of Muslims live in the Asia-Pacific region. (Source: Pew Forum on Religion & Public Life, October 2009)
  • >90% of sukuk issued in Asia: 40% in Malaysia, 50% in West Asia. (Source: Islamic Financial Institutions Services, June 2009)
  • Key players are AOSSG members.

Most Muslims are Asians.

Asia has the biggest sukuk market.

Key players are AOSSG members.

how does it work
How does it work?
  • Sales – Murabahah, BaiInah
  • Fund management, venture capital - Mudarabah, Musharakah
  • Deposit taking – Wadiah, Mudarabah
  • Lease, services - Ijarah
  • Capital market – 14 types of Sukuk, according to AAOIFI
  • Protection - Takaful

Avoid prohibited elements of riba, gharar, maisir

IF transactions based on practices dating to, or pre-date, 1400 years ago

Price differences – cash v. deferred; sale v. repurchase

Participation

Rental / fees

[See Appendix C of the Paper.]

part ii accounting
Part II: Accounting
  • The working group
  • Accounting standards for Islamic finance
  • Different opinions …
  • … which lead to different decisions
  • Notes for other AOSSG WGs
the working group
The Working Group
  • Work done:
    • Assess the extent of use of IFRS among member countries
    • Collate issues / concerns regarding use of IFRS to Islamic transactions
  • Findings:
    • IFRS, local GAAP, AAOIFI
    • Disagreement over some IFRS principles
  • Further work done: Understand reasons for the disagreement found
  • Purpose of Paper
    • Preliminary research
    • To educate

Objective:

Provide input and feedback on adequacy and appropriateness of proposed and existing IFRS to Islamic financial transactions and events.

Framework:

May refer / make reference to other standards. However, will undertake to make recommendations within the framework of IASB’s accounting standards.

Shariah authority:

Shall not be construed as a Shariahopinion.

what standards apply
What standards apply?
  • Shariah interpretations differ.
  • Some jurisdictions accept IFRS, others do not.
  • Why?
    • Time value of money
    • Substance over form
  • Why?
    • Similar to interest, which is riba
    • Disregards contractual form

IFRS, in most jurisdictions

But in some, ‘Islamic’ accounting standards

[See Part I, paragraphs 13-33 of Paper.]

differences of opinion
Differences of opinion …

IFRS

‘Islamic’ standards

Form important

‘Proportionate’

No discounting

Operating lease only

Separate ‘entities’

When ‘sale’ occurs

When ‘sale’ occurs

Substance prevails

Effective interest rate

Discounting

Operating/finance

Single entity

When criteria met

When criteria met

SoF

Cash flows

Valuation

Ijarah

Takaful

Derecognition

Revenue

[See Appendix E of the Paper, Comments from working group members.]

slide14

… which lead to different decisions.

[See Part II, paragraphs 34-121 of the Paper, and Appendix D: IFRS with implications for the reporting of Islamic financial transactions.]

points to note for other aossg wgs
Points to note for other AOSSG WGs
  • Islamic sale and buy back
    • sale + wa’d to buy back
    • Derecognition
    • Revenue recognition
  • Ijarah: Most are currently reported as operating leases
  • Takaful
    • treatment of Qard
    • Takaful operator + funds a/c
  • FV – disapproval of discounting

FI

Revenue

Leases – departure for Ijarah [?]

Consolidation

FS presentation

Insurance

FV measurement – no discounting [?]

Islamic repurchase

Takaful

allowing departures from ifrs
Allowing departures from IFRS

IAS 1, para. 19

“In the extremely rare circumstances in which management concludes that compliance with a requirement in an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, the entity shall depart from that requirement in the manner set out in paragraph 20 if the regulatory framework requires, or otherwise does not prohibit, such a departure.”

IAS 1, para 16

“An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with IFRSs unless they comply with all the requirements of IFRSs.”

For

Against

going forward
Going forward…
  • Working Group
    • Look at impact of upcoming standards
    • Communicate findings to AOSSG / IASB
  • AOSSG
    • Improve cross-border comparability of Islamic financial transactions
    • Education, Outreach
  • Challenge: To understand and be mindful of Shariah interpretations which are less accepting of some IFRS requirements
slide18

Thank you.

AOSSG Islamic Finance WG Secretariat

c/o Malaysian Accounting Standards Board

Suite 5.2, Level 5, Wisma UOA Pantai

No. 11 JalanPantai Jaya

59200 Kuala Lumpur

MALAYSIA

Tel: +603 2240 9200

Fax: +603 2240 9300

Website: www.masb.org.myE-mail: masb@masb.org.my