MASBi- 1 (Presentation of Financial statements of Islamic financial institutions
Need for accounting standard for Islamic financial institutions • Islamic banking financial reporting practices in Malaysia are under the purview of BNM, Companies Act 1965, applicable MASB accounting standard and International Accounting Standard (IAS) • Lack of Shariah consistency as each bank relied on Shariah advisors of respective banks even with the supervision of BNM • Lack of comparability and consistency on the accounting treatment on recognition, measurement and disclosure of Islamic based transactions • Measurement and comparison financial performance of the banks become impossible • Lack of sound regulation on accounting hinders the development of Islamic banking • Efforts by MASB with the guidance of AAOIFI’s standards to develop Malaysian accounting standard for Islamic financial institution
Para 12: Components of Financial Statements A complete set of financial statements include the following components: • Balance sheet • Income statement • Statements showing either (i) all changes in equity, or (ii) changes in equity other than those from capital transactions with owners and distributions to owners; (d) Cash flow statement; and (e) Accounting policies, explanatory notes and appendices
Part 13: Voluntary Additional Statements • A financial review by management describing and explaining the main features of the IFI’s financial performance and finacial position, mentioning principal uncertainities - Factors determining performance, including changes in the environment, its response to those changes, and investment policies aimed at maintaining and enhancing performance, including its dividend policy; - Sources of funding, policy on gearing, and its risk management policies - The IFI’s strengths and resources whose value is not reflected in the balance sheet • An environmental report and value added statements; and • Any other statements useful to others, for example , Zakat Fund and Qard Fund.
Para 17: Departure from standards In the extremely rare circumstances when management concludes that compliance with a requirement in a Standard would be misleading, and therefore that departure from a requirement is necessary to achieve a fair presentation, an IFI should disclose: • Management’s conclusion that the financial statements fairly represent the IFI’s financial position, financial performance and cash flows; • Complied in all material respects with applicable MASB Standards except that they have so departed in order to achieve a fair presentation; • Nature of departure, including the treatment that the standard would require, the reason why that treatment would be misleading in the circumstances and the treatment adopted; and • Final impact of the departure on net profit or loss, assets, liabilities, equity and cash flows
Para 19: Accounting policies Management should select and apply an IFI’s accounting policies so that financial statements comply with all MASB Standards where relevant, and other technical pronouncements issued by MASB. Where there is no specific requirement, management should develop policies to ensure that the financial statements provide information that is: • Relevant to the decision making needs of users; and • Reliable in that they: (i) represent faithfully the results and financial pattern of the IFI (ii) are neutral, that is free from bias; (iii) are prudent; and (iv) are complete in all material respects.
Going concern • Management should make an assessment of an IFI’s ability to continue as a going concern • Financial statements should be prepared on a going concern basis unless management either intends to liquidate the IFI or to cease trading or has no realistic alternative but to do so • When management is aware, in making its assessment, of material uncertainties related to events or conditions, those uncertainities should be disclosed • When the financial statements are not prepared in a going concern basis, that fact should be disclosed, together with the basis on which the financial statements have been prepared and the reason why the IFI is not considered to be a going concern
Para 22 : Accrual basis of Accounting An IFI should prepare its financial statements, except for cash flow information, under the accrual basis of accounting unless otherwise approved by the National Shariah Advisory Council of BNM
Para 23: Consistency of Presentation The presentation and classification of items in the financial statements should be retained from one period to the next unless: • A significant change in the nature of the operation of the IFI’s or a review of its financial statements presentation demonstrates that the change will result in a more appropriate presentation of events or transactions; or • A change in presentation is required by the MASB Standard and technical pronouncements issued by the MASB or other directive or regulation
Para 26: Offsetting • Assets and liabilities should not be offset unless there is a religious and/ or legal right and/ or when permitted by another MASB standard • Offsetting of balance may be made in respect of unearned profit for Murabaha, Bai bithanan Ajil and Ijarah financing against Murabaha, Bai bithaman Ajil and rental receivables
Para 33 & 34- Identification of Financial Statements Financial statements should be clearly identified and distinguished from other information in the same published documents. The following information should be prominently displayed to provide a proper understanding of the information presented: • The name of the IFI’s • Whether individual or group financial statements are presented • The balance sheet date or the period covered by the financial statements; • Reporting currency; and • The level of precision used in the presentation of figures in the financial statements
Para 47: Additional Disclosure • Disclosure useful to users due to the unique features and associated risks of each type of contract For example: - Wadiah contracts guarantee safe custody of deposits. The IFI can decide on discretionary share of income (hibah) to be paid to depositors - Mudarabah deposits are profit sharing deposits where the profit paid is based on a pre-agreed sharing ratio. Their risk profiles are different • The presentation of liabilities is useful to decision makers due to their distinguishing features. Detailed disclosures of contract types and nature of obligations are normally made in the notes to the financial statements • Other liabilities include Istisna payables, salam payables, dividend payables, Zakat and tax payables, which are non profit sharing liability.
Para 71-72 : disclosure of Shariah advisor and Zakat obligations • An IFI should disclose the role and authority of the Shariah advisor or board in monitoring the IFI’s activites pertaining to the Shariah matter • An IFI should also disclose, where applicable, its responsibility towards payment of Zakat on behalf of depositors, shareholders and others
Para 73: Voluntary Disclosure of earnings or expenditure prohibited by Shariah An IFI is encouraged to disclose: • The amount and nature of earnings realized from sources or means which are not permitted by Shariah; • The amount and nature of expenses not permitted by Shariah; and • The manner of disposal of prohibited earnings
Para 80-83: Profit Distribution policy • An IFI that co-mingles various types of deposits into a single pool of funds should disclose the method of allocation of income among various categories of deposits • Discloses the distribution of profit derived from investment of depositor’s funds at gross level after deducting expenditure to the extent that they are directly attributable to the investment of those funds • Allocates income by using a weighted average method balances and allocates a total income to various categories of depositors • Distributes profit derived from investment of depositors funds based on a pre-determined ratio in the case of Mudarabah deposits, and on a ratio determined at the discretion of the IFI’s in the case of Wadiah and other non-Mudarfabah deposits