Report of the Islamic Finance Working Group

Mas Sukmawati Abu Bakar, MASB

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Work done in 2013

Comments on IASB ED/2013/6 Leases

Survey: Accounting & Islamic Finance in

MENA

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IASB ED/2013/6 Leases

• Commendations from Shariah scholars on

right-of-use model

• In-substance purchase

– AOSSG Leases WG: Preserve guidance in IAS 17

on finance leases

– AOSSG IF WG: Islamic finance stakeholders prefer

guidance in ED/2010/9(paragraphs 8, B9, B10 &

BC59–BC62)

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IASB ED/2013/6 Leases (cont.)

• In-substance collaterised borrowing

– AOSSG Leases WG: Request guidance that hire

purchase should be in-substance collaterised

borrowing

– AOSSG IF WG: Noted divergent treatment for

Islamic ‘hire purchase’ i.e. ijarah muntahia

bittamleek, literally, a ‘lease that ends with

ownership’

• Lease (Lease standard)

• Sale (Revenue standard)

• Financing (Financial instruments standards)

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IASB ED/2013/6 Leases (cont.)

• To adapt SIC 27 principles into Lease standard

– Important for sukuk ijarah

– Linked transactions

– Indicators that an arrangement is not an in-substance lease

– Implementation guidance

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(1c) Investors pay SPV

for proportionate shares

in underlying asset

(2a) Investors authorise

SPV to rent-out the asset

(2b) SPV rents asset to

Originator

(1d) SPV pays Originator for

underlying asset

(1b) SPV sells underlying asset to

Investors and issues sukuk to

evidence proportionate shares of

underlying asset

Investors Originator SPV Issuer

(1a) Originator sells

underlying asset to SPV

(2c) Originator pays

rental to SPV (2d) SPV remits rental to

Investors

(3b) Originator repurchases

underlying asset from SPV

(3a) Investors sell-back to

SPV proportionate shares

in underlying asset underlying asset

(3c) Originator pays SPV

repurchase price

(3d) SPV pays Investors

repurchase price

AOSSG Survey

Accounting & Islamic Finance in MENA

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Survey: Accounting & IF in MENA

• Background

– 2011 survey – Lack of discernible accounting

standard-setters in MENA

– 2013 survey of accountants and auditors in 24

MENA countries - 25 responses received

• Highlights

– Co-existence of IFRS and AAOIFI FAS

– Strong support for AAOIFI FAS in MENA

– Treatments that may depart from IFRS

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Survey: IFRS & AAOIFI FAS co-exist

• AAOIFI FAS is primary set of financial

standards, IFRS applied for items not

addressed by AAOIFI

• Entity may apply for exemption from IFRS;

apply AAOIFI FAS instead

• Financial statements may assert compliance

with both IFRS and AAOIFI

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Survey: Strong support for AAOIFI FAS

• 75% of respondents with AAOIFI FAS in their

jurisdictions support retaining the standards

• Some want IASB to publicly announce its

plans for Islamic transactions (e.g. a white

paper) before considering changes to

framework

• In contrast, 78% of responding standard-

setters in 2011 survey did not consider

differential Islamic accounting standards to

be compatible with IFRS convergence.

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Survey: Departures from IFRS

• Q10: Recognition of an element

– 12% expect entities to recognise an item when it

becomes contractual or statutory; may indicate

alignment to AAOIFI conceptual framework

– not when there is probable flow of economic

benefit to/from entity

• Q11: Financing element of murabahah

– Only 48% expect entities to apply effective

interest rate method for financing element of

murabahah

– AAOIFI requires “proportionate allocation”; or

althernatively, cash basis

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Survey: Departures from IFRS (cont.)

• Q12: “Dequity” items

– 56% would be allowed to recognise separate,

intermediary element for items that have

characteristics of both liability and equity

– AAOIFI requirement for URIA

• Q13: Varying treatments for PER

• Q14: Ijarah that is finance lease under IAS 17

– 48% not allowed to recognise ijarah as a finance

lease

– AAOIFI treats all ijarah as operating lease

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Survey: Departures from IFRS (cont.)

• Q15: Measurement of sukuk held for trading

– 76% would most likely measure sukuk held for

trading at FV

– Others at cost or using alternative methods

– One thought proportionate amount of

underlying asset may be used.

• Q16: Takaful presentation

– Only 32% thought takaful operators would

present consolidated FS

– May be departure from IFRS 10 / IAS 27

• Q17: Qard from takaful operator to fund

– Varying treatments expected

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Conclusions

• AOSSG Islamic Finance WG may need

further research on “dual-compliance”

assertion.

• AOSSG may need to consider findings in

dealing with potential members from Middle

East.

• IASB consultative group may need to be

sensitive to MENA stakeholders’ affinity for

AAOIFI FAS in promoting IFRS.

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