May 1-2, 2012

Khartoum-SudanIslamic Banks & Accounting Standards

Dr. Taha Eltayeb Ahmed General Manager

Financial Investment Bank-Sudan

R o l e o f A c c o u n t i n g I n D e c i s i o n M a k i n g

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Standards & Balance Sheet

Structure of Islamic banks

ISLAMIC VS. INTERNATIONAL

ACCOUNTING

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Regulate the industry.

Create Transparent Financial Statements.

Enhance Fair Competition.

Islamic Financial Accounting Standards (FAS) & International Accounting Standards (IAS)-are similar here.

What is the Role of Accounting Standards for Banks

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Do Islamic Banks Need Accounting

StandardsOf course Yes!

They need to be more transparent because of profit & risk Sharing.

Sharia hasn’t prescribed specific accounting methods.

However it has its constraints & Requirements on acceptable accounting Standards.

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For financial Reporting Islamic Banks Relied:

Mainly on IAS.

But sometimes:

1. U.K Accounting Standards.

2. American FASB.

Available Accounting Jurisdictions

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Difficulties with International

Accounting Standards• Sometimes Irrelevant.

• Banks ,Individually, developed their own Standards.

• It was a trial & error process.

• As a result, financial Statements lack:

True & Fair Presentation.

Consistency.

Comparability.

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Examples of Difficulties with

International Accounting Standards∞ Investment A/Cs are neither Liability

nor Owners Equity.

∞ Sale contracts & P/L sharing contracts are not Loans & Advances.

∞ In Ijarah asset is owned by bank, so it is balance sheet item.

∞ Deposits share in profits, no fixed interest. How to account for them?

∞ Islamic banks may have some inventories. How to account for them?

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Examples of Difficulties on I/S

At least SIX different Methods to recognize Murabaha Income:

Up- front method.

End of period method.

As installments fall due.

As cash is received.

Equally allocated over period of transaction.

Declining method.

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Continuation…

Provisions: Charged to bank own revenues or Mudaraba revenues before allocating Investors share of profit?

Accounting for Investment Risk Reserveand Profit Equalization Reserve.

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Islamic Accounting Standards

General Principles and FAS.1

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Establishing AAOIFI

Need was felt for special accounting Standards for Islamic banks.

AAOIFI was established in 1988.

Up to now 22 financial accounting standards have been issued.

FAS no.1 describes;Financial Statements for Islamic banks.

Presentations in financial statements.

General disclosures needed.

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General Principles

Borrow from existing Accounting Jurisdictions to the extent that such rules are Relevant & do not Contradict Sharia.

Develop new Standards to account for transactions peculiar to Islamic Banking.

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Peculiar Standards

FAS 2: Murabaha.

FAS 3:Mudaraba Financing.

FAS 4: Musharaka Financing.

FAS 5: Disclosure of Basis for profit

allocation.

FAS 6: Equity of Investment account

holders and their equivalents.

FAS 7 : Salam and Parallel Salam.

FAS 9 : Zakah.

FAS 11: Provisions and Reserves.

FAS 14: Investment funds.

FAS 18: Islamic financial services

offered by conventional financial

institutions.

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Islamic Standards with equivalent IAS

FAS 1: General presentation….

FAS 8: Ijarah & Ijarah

Muntahia Bittamleek.

FAS 10: Istisnaa & parallel

Istisnaa.

FAS 17: Investments.

FAS 19: Installment Sale.

IAS30:Presentation of financial

statements.

IAS 17: Leases.

IAS : Contract Accounting.

IAS 39: Investments.

IAS 18: Installment Sale

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Islamic Accounting Standards

FAS.1

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Statement of Financial Position

Assets Liabilities, Equity of investment

A/Cs holders & O/E:

Earning Assets Liabilities

Equity of Investment A/Cs

holders.

Fixed Assets Owners Equity

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Equity of Investment A/Cs Holders

Unrestricted Mudaraba A/Cs:On Balance Sheet.

Restricted Mudaraba A/Cs:Off Balance Sheet.

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Income Statement

It is the bank Income statement.

Therefore investors’ share of profit has to be allocated.

That is to say part of revenues should be deducted in the income statement.

That part is the share of investment account holders in the Mudaraba.

Then what will remain is the share of shareholders and the bank Mudarib fee.

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Peculiar Disclosure Requirements

FAS 1 Requires the disclosure of:Method used to allocate profits between investment

account holders and shareholders.

Earnings or expenditure prohibited by Sharia.

Sources and uses of Zakah and charity funds.

Bank responsibility for payment of Zakah.

Relations between bank and restricted investment account holders as Mudarib or agent.

Bank social responsibility.

Appointment,power and responsibility of ShariaSupervisory Board.

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Statement of Changes in Restricted

Investments

Should segregate restricted investments by source of financing.

Should segregate investment portfolio by type.

Should disclose the following:

Balance of restricted investments at beginning.

Number of units in each portfolio & value per unit.

Deposits received or units issued during period.

Withdrawal or repurchase of units.

Mudarib share of profit.

Number of units at end of period.

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Peculiar Statements

ΩStatement of Changes in Quard.

ΩStatement of changes in Zaka and Charity fund.