AAOIFI's CIPA Course Material - Prepared & Presented by Yasir Waseem

AAOIFI Financial Accounting Statement - No. 1
Framework for Financial Reporting by Islamic Financial Institutions
Presented By:
Yasir Waseem (ACA, ACCA, CIA, CISA, CIPA, CSAA)

PURPOSE OF FINANCIAL REPORTING FRAMEWORK
OF AN IFI
 A financial reporting framework for an IFI is
important because it:
 Guides both standard setters and regulators in developing and
implementing accounting and reporting standards
 Assists in developing alternative standards in lieu of absence or non-existence
of conventional standards
 Instils, as well as increases, user confidence in accounting treatment and
information provided in financial reports
 provides direction to the development of consistent accounting and reporting
standards

PURPOSE OF FINANCIAL REPORTING FRAMEWORK
OF AN IFI
 The establishment of these objectives does not preclude the adoption of existing
conventional accounting standards that do not contravene Shari’a principles.
However, due to the unique nature of Islamic banking, which is neither loan nor
interest-based, there is a further need to re-examine banking practices, not from a
lender perspective but from that of a partner/investor cum trader. The adoptions
of profit and loss sharing principles, as well as debt-based financing, reframe the
adoption and application of appropriate accounting policies in IFIs.
 The user group of IFI statements and reports is expanded to include not only
investors such as shareholders, but also investment account holders, depositors,
regulators, Zakat agencies and other stakeholders that directly or indirectly rely on
financial information relating to the profitability, liquidity, solvency and legitimacy
objectives of IFI activities.

OBJECTIVES OF FINANCIAL ACCOUNTING
 To determine the rights and obligations of all interested parties, including those
rights and obligations resulting from incomplete transactions and other events, in
accordance with the principles of Islamic Shari’a and its concept of fairness,
charity and compliance with Islamic business values
 To contribute to the safeguarding of the Islamic bank’s assets, its rights and the
rights of others in an adequate manner
 To contribute to the enhancement of the managerial and productive capabilities
of the Islamic bank, which encourage compliance with its established goals and
policies, and, above all, compliance with Islamic Shari’a
 To provide through financial reports, useful information to users of these reports,
to enable them to make legitimate decisions in their dealings with Islamic banks.

OBJECTIVES OF FINANCIAL REPORTING
 To provide information about the Islamic bank’s compliance with the Islamic
Shari’a and its objectives and to establish such compliance and information of the
separation of prohibited earnings and expenditures, if any, which occurred, and of
the manner in which these were disposed of.
 To provide information about an Islamic bank’s economic resources and related
obligations (the obligations of the Islamic bank to transfer economic resources to
satisfy the rights of its owners or the right of others), and the effect of
transactions, other events and circumstances on the entity’s economic resources
and related obligations; this information should be directed principally at assisting
the user to evaluate the adequacy of the Islamic bank’s capital to absorb losses
and business risks assessing the risk inherent in its investments and to evaluate
the degree of liquidity of its assets and liquidity requirements for meeting its
other obligations

OBJECTIVES OF FINANCIAL REPORTING
 To provide information to assist the concerned party in the determination of Zakat
on the Islamic bank’s funds and the purpose for which it will be disbursed
 To provide information to assist in estimating cash flows that might be realized
from dealing with the Islamic bank, the timing of these flows and the risk
associated with their realization; this information should be directed principally at
assisting the user in evaluating the Islamic bank’s ability to generate income and
to convert it into cash flows and the adequacy of those cash flows for distributing
profits to equity holders and Investment Account Holders (IAHs)
 To provide information to assist in evaluating the Islamic bank’s discharge of
fiduciary responsibility to safeguard funds and to invest them at reasonable rates
of returns on the bank’s investments, and the rate of return accruing to equity and
IAHs
 To provide information about the Islamic bank’s discharge of its social
responsibilities.

ACCOUNTING RECOGNITION AND MEASUREMENT
CONCEPTS
 Accounting RECOGNITION refers to the recording of the elements of the financial
statements in a timely and accurate manner. These elements include assets,
liabilities, investment accounts and equities for the balance sheet, as well as
revenue, expenses and gains of the income statement. In addition, the recognition
principle also applies to timely recognition of profits and losses resulting from
restricted investments in the statement of changes in restricted investments.
 Accounting MEASUREMENT refers to the determination of the amount at which
assets, liabilities and equities of both unrestricted IAHs and owners’ equity are
recognized. It also refers to the amounts of restricted investment accounts. From
an entity perspective, the positive valuation of net assets is recorded as profits or
gains due to ordinary or incidental activities respectively. From the contract
perspective specific principles are applied such as the adoption of the Mudaraba
profit and loss sharing principle which is applied in measuring the amount of
distributable profits.

ACCOUNTING ASSUMPTIONS
 The going concern concept
 The periodicity concept
 Substance over form

Going Concern
 The going concern concept implies that the business will
continue to operate for the foreseeable future. As a result,
if there is no going concern problem, it is considered
sensible to keep to the use of the historical cost concept
when arriving at the valuations of assets.
 Example of going concern problem for an IFI may be the
certain conditions leading to bankruptcy of an IFI.

THE PERIODICITY CONCEPT
 Accrual Basis
 There is an obligation on the IFIs to present periodic reports reflecting
their financial position as of a given date and the results of their
operation during a specific period in order to disclose the rights and
obligation o f the IFI and those of interested parties. This is particularly
relevant in the process relating to the payment of Zakat.
 The accrual concept of accounting when adopted requires that financial
accounting effects of transactions and other events are recognized and
recorded in the accounting records as and when they occur and they are
reported in the financial statements of the period to which they relate.

THE PERIODICITY CONCEPT
 Cash Basis of accounting
 Under certain circumstances, the adoption of the cash basis of
accounting becomes relevant, for instance, upon the liquidation of IFI.
 Cash basis of accounting represents the adoption of policy to record and
recognize transactions, events, circumstances or condition whereby the
financial accounting effects are recognized and recorded in the
accounting records as cash or its equivalent is received or paid and they
are reported in the financial reports of the periods to which the receipts
or payments relate.

SUBSTANCE OVER FORM
 It can happen that the legal form of a transaction can differ from its real
substance. Where this happens, accounting should show the transaction in
accordance with its real substance which is, basically, how the transaction
affects the economic situation of the business. This means that accounting
in this instance will not reflect the exact legal position concerning that
transaction.
 However, from Shari’a perspective, Substance over form concept is
different from how it is interpreted in the context of conventional
standards.
 In certain transactions substance is overruled by its legal form from Shari’a
perspective. finance lease and sale and lease back are examples.

QUALITATIVE CHARACTERISTICS OF ACCOUNTING
INFORMATION
 Relevance – Does it produce information that is useful for assessing stewardship
and for making economic decisions?
 Reliability – Does it reflect the substance of the transaction and other events
that have occurred? Is it free of bias, i.e. neutral? Is it free of material error? If
produced under uncertainty, has prudence been exercised?
 Comparability – Can it be compared with similar information about the entity
for some other period or point in time?
 Understandability – Is it capable of being understood by users who have a
reasonable knowledge of business and economic activities and accounting?

AAOIFI Standard FAS - No. 1
General Presentation and Disclosure in the
Financial Statements of Islamic Banks
and Financial Institutions.
Presented By:

Components of Financial Statements of IFIs
 The financial statements of any reporting entity comprise
the balance sheet, income statement, cash flow
statement, statement of owners’ equity as well as
accompanying notes on accounting policies that are
integral to the financial statements. In the case of IFIs,
these statements are similarly adopted for reporting
purposes. In addition, statement of changes in restricted
investments, statement of sources and uses of funds in
the Qard / Hassan and charity fund and statement of
sources and uses of funds in the Zakat fund are
statements of financial activities that involve mobilization
of funds not reported in the balance sheet.

Balance sheet of an IFI
A Balance Sheet is a statement of financial position of a reporting entity
at a point in time. It is based on the following accounting equations:
However in IFIs, the involvement of IAHs who have a significant
equity claim based on the Mudaraba contract, influenced the
accounting equation as follows:
Liabilities + EquityAssets =
Sources of FundsUses of Funds =
Liabilities + Unrestricted Investment
Accounts + Equity
Assets =

Treatment of Changes in Accounting Policies
 If the Management of Islamic Bank decides to change an accounting policy, the new
policy should be applied retroactively by restating the financial statement for the last
period presented unless it is not practicable to obtain the data necessary for the
restatement or the data is not available.
 If the data necessary for restating one or more of the prior period financial statement
are not available or not practicable to obtain, retained earning as of the beginning of
the current or a prior period, as appropriate, should be restated to reflect the
cumulative effect of the change in the accounting policy on the prior periods which
are not restated. The amount of that cumulative effect should be disclosed.
 The balance of the retained earnings at the beginning of the first period presented
should be adjusted to reflect the cumulative effect of the change on the prior periods
which are not presented.
 The adoption of the new accounting policies are not considered as change in the
accounting policies and the effect is applied prospectively (Current & Future Periods).

Treatment of Changes in Accounting Estimates
 The effect of Changes in Accounting Estimates is applied
prospectively. It should be reflected in :
 The period of the change if the effect of the change is limited to that
period.
 The period of the change and future periods if the change affects the
current and future periods.

Treatment of correction of an Error in prior period
Financial Statements
 An error in prior period financial statements should be corrected
retroactively by restating the financial statements for all prior
period presented which have been affected by the error.
 Retained earnings at the beginning of the first period presented
should be adjusted to reflect the cumulative effect of the correction
of the error on the periods which are not presented but which were
affected by the error.

Murabaha & Murabaha to the Purchase Orderer
Presented By:

Scope of the Standard
 This Standards Shall apply to Assets available
for sale by Murabaha and Murabaha to
purchase orderer, the revenues, expenses,
gains and losses attributable to such an asset
as well as Murabaha receivable.

Definition of Murabaha
 Sale of goods at cost plus an agreed profit markup. Its
characteristic is that “the seller should inform the purchaser of the
price at which he purchase the product and stipulate an amount of
profit in addition to this”.
Definition of Murabaha to Purchase Orderer
 The Murabaha to the purchase orderer is the sale of an item by the
institution to a customer (the purchase orderer) for a pre-agreed
selling price which includes a pre-agreed profit markup over its cost
price, this having been specified in the customer’s promise to
purchase. By this it is distinguished from the normal type of
Murabaha which doesn’t involve such a promise by the customer

Measurement of Asset Value at Acquisition by Islamic Bank
 “The assets possessed by Islamic banks for the purpose of selling them on
the basis of Murabaha or Murabaha to purchase order shall be measured
at the time of their acquisition on an historical cost basis”.
 Following entries are required:
Dr
Cr
Inventory (assets available for sale by Murabaha or
Murabaha to Purchase orderer)
Cash/ Bank/ Vendor

Measurement of Asset Value after acquisition by Islamic Banks
Is there any binding promise of
Purchase Orderer
Yes No
Accounting Treatment
Carry @ historical cost less
amount declined due to
damage ,destruction or other
unfavorable circumstances.
Any indications of possible
non-recovery of costs of
goods available for sale
No Yes
Accounting Treatment
Measurement @ cash
Equivalent Value (i.e.
Net Realizable Value @
the end of each
financial period.
Dr
Cr
Provision for decline in value of Murabaha
Inventory (B/S)
Loss due to decline in value of Murabaha
Inventory (P/L)

Presentation in the Financial Statements of Murabaha
Inventory
Presentation on Balance Sheet
Murabaha Inventory XXX
Less : Decline in value* (XXX)
XXX
* Decline in Value of assets due
to damage / destruction is
directly charges to Income
Statement.
Murabaha Inventory XXX
Less : Provision for
decline in value of
Murabaha Inventory (XXX)
XXX
Provision account is maintained until the
disposal/sale of Murabaha Inventory.

Key Concepts
 From accounting point of view, AAOIFI considers Murabaha
transactions as trading transaction instead of financing.
 Revenues and cost of goods sold shall be recognized @ the
time of concluding the sale contract subject to deferral of
profits.

Recognition of Murabaha Receivable
- Murabaha receivables shall be recorded at the time of
occurrence at their face value.
- Murabaha receivables are measured at the end of financial
period at their cash equivalent value i.e. the amount of debt
due from the customers at the end of financial period less any
provision for doubtful debts.
- Murabaha receivable are reduced by the amount of
installments as when received for the customer.
Murabaha Receivables XXX
Provision for doubtful debts (XXX)
Cash equivalent value XXX
Dr
Cr Murabaha Receivable
Bank/ Cash

Recognition of Murabaha Profits
 Accrued Basis (Preferred Treatment)
 “Proportionate allocation of profits over the period of credit where by
each financial period shall carry its portion of profit s irrespective of
whether or not cash is received”.
 Murabaha receivable shall be recorded @ the time of occurrence of sale
@ their face value.
 End of Financial Period
Dr
Cr Inventories
Murabaha Receivable
Dr
Cr Income from Murabaha sales
Deferred Murabaha profits
Profit / Deferred Murabaha ProfitCr

Recognition of Murabaha Profits
 Receipt Basis (Only when sharia supervisory board / supervisory authority
requires to do so)
 Deferred Murabaha profits are are reduced by the in proportion to the
amount of installments as when received for the customer. Corresponding
credit entry would be “income from Murabaha sale”
Dr
Cr Income from Murabaha sales
Deferred Murabaha profits

Presentation in the Financial Statements
Balance Sheet
Murabaha Receivables XXX
Provision for doubtful debts (XXX)
Deferred Profits (XXX)
Income Statement
Income from Murabaha sales XXX

Potential discounts to be obtained after acquisition of
Assets
 “In the cases where Islamic bank is likely, at the time of concluding the
contract with the client, to obtain a discount on Murabaha to the purchase
orderer, and the discount is in fact received subsequently, such discount
shall not be considered as revenue for the Islamic bank; instead, the cost of
the relevant goods shall be reduced by the amount of discount.
Consideration should be given to the effect this shall have on both the
profits of the period and deferred profits”.
Dr
Cr
Deferred Profits
Cost of Sales

Treatment of Settlement with deductions of part of profit
 If a client accelerates payment of one or more instalments prior to the
date specified for such payment, the Islamic bank may deduct part to be
agreed upon between the Islamic bank and the client at the time of
settlement. The deducted amount shall be credited to the Murabaha
receivables account and excluded from the profit recognized in respect of
the instalments.
Dr
Cr Murabaha Receivable
Deferred Murabaha

Hamish Jiddiyyah (Security Deposit Held as Trust)
 “It is the amount paid by the purchase orderer upon request of the
purchaser to make sure that the orderer is serious in his order of the asset.
However, if the promise is binding and the purchase orderer declines to
purchase the asset, the actual loss incurred to the purchase shall be made
good from this amount”.
Treatment of Hamish Jiddiyyah
Dr
Cr Security Deposit (Hamish jiddiyyah)
Cash/ Bank/ Party a/c

Question -1
 Upon receiving a binding purchase order to buy a car with market value of USD
11,000, the bank collected from the client USD 1,000 as Hamish Jiddiyyah on
25/10/2013, then signed and executed the related Murabaha Contract at
01/11/2013 with value of USD 10,000 collectible via 10 monthly installments ( and
Hamish Jiddiyyah was considered as payment for the First Installment). Knowing
that the car cost the bank USD 9,000 and the client is paying the installments on
regular basis, what is the effect of the operation on the bank accounts at
31/12/2013.
A B C D
Receivable – Client Account 8,800 8,000 8,000 8,000
Income – Deferred sales 2,200 1,000 200 200
Deferred profits 0 0 800 800
Unrecognised gains 0 1,000 0 1,000

Question - 2
XYZ Limited, the purchase orderer, in a binding promise under a Murabaha contract
with an Islamic Bank agrees to buy goods worth USD 5,500 and pays USD 500 as
Hamish Jiddiyyah. However, XYZ Limited fails to fulfill its promise and as a result, the
Islamic Bank sales the goods to another client for USD 3,000. The accounting
treatment for this in the Islamic Bank’s books will be (assuming cost of good for the
bank was USD 5,000)
A) Consider Hamish Jiddiyyah paid (USD 500) as an obligation and treat it as a liability unless
the Sharia Supervisory Board of the Islamic Bank decides otherwise.
B) To record losses incurred (USD 2,000) from sale of asset to another client in the income
statement.
C) To deduct the losses incurred (USD 2,000) first from Hamish Jiddiyyah paid and record the
balance (USD 1,500) in Income Statement.
D) To Deduct the amount of actual loss (USD 2,000) from Hamish Jiddiyyah and record the
balance losses (USD 1,500) as an amount due from the original purchase orderer.

DEFERRED PAYMENT SALE (Bay Muajjal)
Presented By:

 This Standard shall apply to
 Assets available for deferred payment sale,
 Revenue, expenses, gains & losses relating to
these assets, and
 Receivable arising from the deferred payment
sale transactions

Reasons for the Standard
 The IFIs have followed the practice of conducting some of their investment
operations under various titles of deferred payment sale, sale by installment
or sale with deferred payment together with other deferred sale operation
under the terminology of “Murabaha to the purchase orderer” or
“Musawwamah”. The Shari'a requirements and the procedures for these
transactions differed from one bank to another. These also differed from
those of the Murabaha to the purchase orderer. As a result of these
differences in practice, IFIs differ in their accounting treatment of deferred
payment sale transactions. The Financial Statements of the IFIs differ as to the
recognition & measurement of assets available for sale, receivables relating
to deferred payment sale transactions, the recognition of profits and the
treatment of early settlement and reduction of profit & financial penalty.
As a result, a number of inquiries by IFIs were raised to AAOIFI regarding the
accounting problems of deferred payment sale transactions, which are not
treatment in FAS No. 2 “Murabaha and Murabaha to purchase orderer”. This
has led AAOIFI to prepare a separate standard on deferred payment sale.

Main Difference
Murabaha Vs Deferred Payment Sale
Deferred payment sale or Bay Muajjal reporting standard provides
reporting requirements for financing of sale of commodities at a
negotiated price. Unlike the Murabaha standard, which requires
disclosure of cost to the customer, the deferred payment sale
does not require such disclosure. On the other hand, the
customer has an option to revoke within a stipulated period. The
accounting treatment also addresses the deferred profit to be
recognized during the financing period.

RECOGNITION FOR ASSETS AVAILABLE FOR
DEFFERED PAYMENT SALE
 The asset available for deferred payment sale shall be recognized at
the point of contracting. Note that asset would be recognized at the
time of contracting instead of delivering of assets.
 In cases the purchase contract between the institution and the
supplier includes an option for the former to revoke the contract,
the assets acquired shall not* be recognized as asset to the
institution till the option period. Any amount paid shall be
recognized as advanced payments.
* By mistake the Standard missed the word “not”.
Dr CrAdvance Payment against Asset Cash/ Bank

INITIAL MEASUREMENT
 The initial measurement for the recognition for assets available for
deferred payment sale shall be measured at cost which includes the
purchase price and all other expenses directly related to acquisition
of assets.
Dr
Cr
Assets available for deferred payment sale
Cash/ Bank

MEASUREMENT AT THE END OF FINANCIAL PERIOD
 Asset available for deferred payment sale shall be
measured at their fair value. At the end of financial period
the unrealized gains and losses resulting from re-
measurement of assets available for deferred payment
sale shall be recognized in an “Investment fair value
reserve” account. Consideration shall be given to the split
between the portion related to owners equity and the
portion related to unrestricted investment
accountholders.

 Any unrealized losses resulting from the re-measurement of assets
available for deferred payment sale at fair value shall be recognized
in the statement of financial position under “Investment fair value
reserve” to the extent of the available balance in this reserve. In
case such losses exceed the available balance, the excess amount
shall be charged to the income statement under “unrealized re-
measurement gains or losses on investments”. In case there are any
unrealized losses that were recognized in the income statement in a
previous financial period, these shall be deducted from unrealized
gains relating to the current financial period. Any resulting excess in
the unrealized gains shall be credited in the “investment fair value
reserve” in the statement of financial position.

 The difference will be accounted for as follows.
Example - 1
Dr
Cr
Investment fair value reserve
50
50

FINANCIAL STATEMENT PRESENTATION
AT THE END OF FINANCIAL PERIOD

 Now in June 2016, if the fair value of asset becomes €80 following
accounting entry would be made.
Dr
Dr
Unrealized re measurement on investment
Investment fair vale reserve
Cr
(balancing figure)
20
50
70

Example - 2
Dr
Cr
Unrealized re measurement loss on investment
Assets available for deferred payment sale 40
40

 Now in June 2016, if the fair value of asset becomes €140 following
accounting entry would be made.
Dr
Cr
Unrealized re measurement gain on investment ((to the
extent charged to income statement n previous period)
Cr Investment fair value reserve (balancing figure)
80
40
40

ACCOUNTING TREATMENTS FOR REVENUES AND PROFITS
FOR DEFERRED PAYMENT SALE
RECOGNITION OF REVENUES AND PROFITS
 Revenues from deferred payment sale transaction shall be
recognized at the point of contracting of sale at deferred payment
basis.
 Profits from deferred payment sale shall be recognized on an accrual
basis and proportionally allocated over the period of the contract,
whereby each financial period shall carry its portion of the profits.

RECOGNITION OF REVENUES AND PROFITS
 Now in example 2 above if the assets are sold on Dec 2015 for €200
for deferred payment basis of 2 years, the amount will be paid in 6
monthly installment (i.e. €50 every 6 months).
 following accounting entries are required
Dr
Cr
Receivable from deferred payment sale
Assets available for deferred payment Sale
Cr Deferred profit account
200
140
60

ACCOUNTING ENTRY AT JUNE 2016
 For recognition of deferred profit in Income Statement
 For receipt of 6 monthly installment made by the Debtor
Dr Deferred Profits Account
Cr Profit from deferred payment sale
15
15
Dr Cash /Bank
Cr Receivable from deferred payment Sale
50
50

 In case a debtor accelerates the payment of one or more
installments prior to the date(s) specified for such
payments and the institution agrees on reducing its profits
by an amount agreed upon by both the institution and the
debtor at the time of settlement, then the reduced
amount shall be credited to the receivables account and
debited to the deferred profits account.
Dr Deferred Profits Account
Cr Receivable from deferred payment Sale

 In case a debtor accelerates the payment of one or more
installments prior to the dates specified for such payments
and the institution did not allow the debtor a deduction of
part of the profit but asked the debtor to pay the amount
and thereafter the institution reimbursed the debtor with
part of the profit then the reduced amount shall be paid
to the debtor and deferred profit account shall be debited
accordingly.

 In case a debtor is delinquent I paying his outstanding
installments and the institution has charged an additional
amount on this outstanding debt (either by mutual
agreement or by court) the additional amount shall be
recognized in “Charity account” and presented in the
“Statement of sources and uses of Zakah and charity
funds”
Dr Receivable from customer
Cr Charity Account

Salam & Parallel Salam
Presented By:

 The standards addresses the accounting rules of Salam
financing and parallel Salam transactions. This includes :
 Treatment of ras-almal (Capital of Salam) paid by the Islamic
Bank in a Salam transaction or that which it receives in a
parallel Salam transaction
 The receipt and sale of al-muslam fihi in Salam transaction or
the delivery of its like in a parallel Salam transaction.
 Treatment of revenues, expenses, gains & losses relating to
Salam financing and parallel Salam transaction.

Definition of SALAM
 A Salam transaction is a purchase of a commodity for
deferred delivery in exchange for immediate
payment. It is a type of sale in which the price,
known as the Salam capital, is paid at the time of
contracting while the delivery of the item to be sold,
know as al-muslam fihi (the subject matter of the
Salam contract), is deferred.
 The Seller and the buyer are know as Al-Muslam
ilaihi & Rabb al-salam respectively.

Recognition of the Salam Financing
 Salam financing shall be recognized when capital of Salam is:
Paid to Al-Muslam ileihi (in cash or in kind)
OR
It is made available to him
Dr
Cr
Salam Financing
Cash / Bank

Recognition of the Parallel Salam
 Parallel Salam is recognized when Islamic Bank received the capital
of Salam (in cash or kind)
Dr
Cr
Cash / Bank
Parallel Salam

Initial Measurement of the Salam Capital
 Capital of Salam is measured by the amount paid.
 Capital provided in kind shall be measured at the fair value
of asset.

Measurement at the end of the Financial Period
 Capital is measured at historic cost.

Measurement at the end of the Financial Period
 If it is probable that Al-Muslam-ileihi will not deliver al-muslam-fihi
in full or in part, or it is probable that the value of al muslam fihi will
decline following accounting entry would be made:
Dr
Cr
Provision for loss / Diminishing in value of al muslam fihi
(Profit & Loss)
Accumulated Provision for loss / Diminishing in value of al
muslam fihi (Balance Sheet)

Financial Statement Presentation
Statement of Financial Position
Assets
Salam Financing XXXX
Liabilities
Parallel Salam XXXX

On Receipt of Al-Muslam Fihi (Salam Product)
 Assets constitutive with Al-muslam fihi received by Islamic bank in
accordance with the contract are recorded their historical cost.
 Following accounting entry is required:
Dr
Cr
Salam (Goods) Inventory
Salam Financing

In case of receipt of similar kind of Al-muslam fihi but of
different quality
If Market Value or Fair Value of Al-Muslam Fihi
=
Book value of Salam financing contracted Al-Muslam Fihi
Then,
Salam Inventory is measured at book value.

In case of receipt of similar kind of Al-muslam fihi but of
different quality
<
Then,
Salam inventory shall be measured and recorded at fair value or
market value. The difference between book value and fair value
shall be recognized as loss to the bank.
Dr
Cr Salam Financing
Salam (Goods) Inventory (@Fair Value)
Provision for loss in value of al Muslam FihiDr

Substitution of another kind of goods for al-Muslam fihi
(same treatment as before)
<
Then,
Salam inventory shall be measured and recorded at fair value or
market value. The difference between book value and fair value
shall be recognized as loss to the bank.
Dr
Cr Salam Financing
Salam (Goods) Inventory (@Fair Value)
Provision for loss / Diminishing in value of al Muslam Fihi (P&L)Dr

Measurement of the Value of Al-Muslam Fihi at the end of a
Financial Period after it is received
 Salam Inventory shall be valued at lower of
 Historic Cost &
 Cash Equivalent Value
 In case of Cash Equivalent Value is lower than the Historic
Cost the difference shall be recognized as loss in the Income
Statement.
Dr
Cr
Provision for loss / Diminishing in value of al muslam fihi
(Profit & Loss)
Accumulated Provision for loss / Diminishing in value of al muslam fihi
(Balance Sheet)

Revenue Recognition
Key Concept
 Revenue & Profit in Salam financing is recognized
upon delivery / Sale of goods by Islamic Bank.
 Profit in Parallel Salam is recognized upon delivery
of goods by Islamic Bank to the ultimate buyer.

Recognition of the result of delivering of Al-Muslam Fihi in a parallel
Salam transaction
 Upon delivery of Al-Muslam Fihi by the Islamic Bank to the client in
a parallel Salam transactions, the difference between the amount
paid by the client and the cost of Al-Muslam Fihi shall be recognized
as profit or loss.
Dr
Cr Salam Inventory (Net Amount)
Parallel Salam
Profit on Sales of Salam (P&L)Cr

Failure of Islamic bank to receive Al Muslam Fihi or part thereof at the
due date of delivery
 Delivery date is extended, Salam inventory is not recognized till
receipt and Salam financing account shall remain in the book at
book value.
 Salam financing contract is completely or partially canceled and the
client does not repay the capital of Salam.
Dr
Cr Salam Financing
Receivable from customer

Failure of Islamic bank to receive Al- Muslam fihi due to client’s
misconduct or negligence
Islamic bank has securitized pledge of al Muslam – fihi
If Sales proceed from sale of Al muslam - fihi is
Greater than the recorded book
value of al Muslam - fihi
Less than the recorded book value of
al Muslam - fihi,
Dr
Cr Salam Financing
Cash / Bank (Sales Proceed)
Cr Customer Account (Bal Fig)
Dr
Cr Salam Financing
Cash / Bank (Sales Proceed)
Dr Receivable from Cust (Bal Fig)

Failure of Islamic bank to receive Al- Muslam fihi due to client’s
misconduct or negligence
Islamic bank has not securitized pledge of al Muslam – fihi
Dr
Cr Salam Financing
Receivable from customer

 When Salam is recognized following Accounting entry is passed.
 A)
 B)
 C)
Dr
Cr
Salam Financing
Third party A/C
Dr
Cr
Salam Financing
Cash
Dr
Cr
Bank
Salam Financing

Istisna’a & Parallel Istisna’a
Presented By:

 The standards addresses the accounting rules of
Istisna’a and Parallel Istisna’a contracts in the
financial statements of Islamic banks relating to
measuring and recognizing the cost and revenues
from Istisna’a, the gains and losses accruing
therefrom and their presentation and disclosure in
the financial statement of the bank.

Definition of Istisna’a
 It is a sale contact between al-mustasni (the ultimate
purchaser) and Al Sani ( the seller) whereby al-sani –
based on an order from the al-mustasni – undertakes
to have manufactured or otherwise acquire al-masnoo
(Subject matter of the contract) according to
specification and sell it to al-mustasni for an agreed
upon price and method of settlement whether that be
at the time of contracting, buy installment or deferred
to specific future time.

ACCOUNTING TREATMENTS BY ISLAMIC BANKS AS AL-SANI (SELLER)
UPON INCURRING PRE CONTRACT COST
UPON Signing of ISTISNA’A Contract
Dr Istisna’a work in progress
Cr Deferred Cost
Dr Deferred Cost
Cr Cash/ Bank

UPON INCURRING COST
UPON BILLING TO Al-MUSTASNI / CUSTOMER / (ULTIMATE PURCHASER)
Dr Istisna’a work in progress
Cr Cash/ Bank
Dr Account receivable –Istisna’a
Cr Billing account –Istisna’a ( contra asset account)

UPON RECEIPT OF BILLING
Key Note
At the end of the contract the amount of billing account will be equal to
Istisna'a work in progress account.
Dr Cash/ Bank
Cr Account receivable – Istisna’a

ISTISNA’A REVENUE AND PROFIT AT THE END OF FINANCIAL PERIOD
ISTISNIA’A REVENUE AND PROFITS
Istisna’a revenue is the total price agreed between the Islamic Bank as
‘Al-Sani’ and the ultimate client as ‘Al-Mustasni, including the Islamic
Bank’s profits margin on the contract. Istisna’a revenue and associated
profit margin are recognized in the Islamic banks financial statements
according to either the percentage of completion or the completed
contract methods as set up below taking into consideration what is
stated in item 2/3/1/2.

ISTISNA’A REVENUE AND PROFIT AT THE END OF FINANCIAL PERIOD
REVENUE RECOGNITION METHOD
Percentage of completion and estimated expected cost to complete the
contract can be measured with reasonable accuracy.
Yes No
Percentage of Completion Method Completed Contract Method
(POC) (CCM)

PERCENTAGE OF COMPLETION METHOD
ISTISNA’A REVENUE
 A part of contract price commensurate with the work performed during each
period in which the contract is being executed shall be recognized as revenue for
that period.

PROFIT FOR THE ACCOUNITNG PERIOD
 The portion of the Istisna’a profit margin recognized during the financial period (
Istisna’a profit margin being the difference between the cash price of al- masnoo
to the ultimate purchaser and the Islamic banks estimated total Istisna’a costs)
shall be added to the Istisna’a work in progress account. Thus, at any point in
time, the balance of the Istisna’a work in progress account will include the
amount of profit recognized to date subject to deduction of any anticipated
contract losses

ACCOUNTING ENTRY AT THE END OF PERIOD
Dr Istisna’a work in progress (with profit recognized)
Dr
Cost of Istisna’a revenue (with difference between revenue
and profits)
Cr Istisna’a revenue ( with revenue recognized)

DEFERRED PROFITS
 If part of the progress payment falls after al mansoo is delivered, deferred profits
are setup and amortized in proportionate to installments receivable.
 Deferred profits = total price that is paid during the contract (i.e. delivery of al
mansoo) – agreed total price of contract.
Dr
Istisna’a revenue (if profits recognized exceed the proportion
of installments receivable)
Cr Deferred profits

DEFERRED PROFITS
 Deferred profits shall be recognized as follows
Dr Deferred Profits
Cr Istisna’a Profit (Profit and loss account)

FINANCIAL STATEMENT PRESENTATION AND DISCLOSURE

EQUITY OF INVESTMENT ACCOUNT
HOLDERS
Presented By:

 This Standards addresses the accounting rules
relating to funds received by the Islamic Bank
for investment in its capacity as a “Mudarib” at
the Islamic Bank’s discretion, either in
whatever manner the Islamic Bank deems
appropriate.

RECOGNTION
 Equity of unrestricted investment account holders shall be recognized
when received by Islamic bank.
 In case the Islamic bank makes it a condition that the funds will not be
invested before a certain date than the funds received shall be recorded in
current account until their date of investment is due.
INITIAL MEASUREMENT
 Equity of unrestricted investment account holders shall be measured by
the amount received by the Islamic bank at the time of contracting (i.e.
account opening).

 At the end of a financial period, equity of unrestricted investment
account holders shall be measured at the time of their book value.
Dr
Cr
Cash / Bank
Equity of Unrestricted Investment Account (customer account)

ALLOCATION OF PROFITS ON JOINTLY FINANCED INVESTMENTS
 Profits of an investment jointly financed by the Islamic
bank and restricted investment account holders shall be
allocated between them according to the contribution of
each of the two parties in the jointly financial investment

ALLOCATION OF LOSS ON JOINTLY FINANCED INVESTMENTS
 Loss resulting from transactions in a jointly financed investment (that is
recognized during a period other than that in which final settlement of the
investment account is made) should in the first instance be deducted from
any undistributed profits on the investment. Any such loss in excess of the
amount of undistributed profits should be deducted from provisions for
investment losses formed for this purpose. The remaining loss, if any,
should be deducted from the respective equity shares in the joint
investment of the Islamic bank and unrestricted investment account
holders, according to each party’s contribution to the joint investment.

Dr 1. Unrestricted Profits on investments
Dr 2. Provision for Investment losses
Dr 3. Equity of Bank
Dr 4. Equity of Investment account holder
Cr Loss on Jointly financed Investment

 Loss due to misconduct or negligence on the part of the Islamic bank,
based on the opinion of the Shari’a supervisory board of Islamic bank, shall
be deducted from the Islamic bank’s share in the profits of the jointly
financed investment. In case the loss exceeds the Islamic bank’s share of
profits, the difference should be deducted from its equity share in the joint
investment, if any, or recognized as due from the Islamic bank.
Dr Accumulated Profits from jointly financed Investments (Islamic bank’s portion)
Cr Loss on Jointly financed Investment

EQUITY OF RESTRICTED INVESTMENT ACCOUNT HOLDERS
AND THEIR EQUIVALENT
 Assets and liabilities relating to equity of restricted investment
account holders and their equivalent shall be treated separately
from the Islamic banks assets and liabilities. (Off Balance Sheet)
 Recognition and measurement criteria are the same as for equity of
unrestricted investment account holders.

PRESENTATION
 Equity of unrestricted investment account holder shall be presented
as an independent category (separate line item) in the statement of
financial position of Islamic bank between liabilities and owners
equity
 Information on the equity of restricted investment account holders
shall be presented in the statement of changes in restricted
investments and the equivalents or at the foot of the statement of
financial position.

Disclosure of Basis for Profit
Allocation Between Owners’ Equity
And Investment Account Holder (IAH)
Presented By:

PROFIT DISTRIBUTION MECHANISM
DEPOSITORS AND SHAREHOLDERS
 Unlike the interest expense, profit distribution involves the mutual
agreement between IAHs as to an agreed profit-sharing ratio, as well as to
what constitutes profit distributable to the IAHs. Under the Mudaraba
contract, dividends paid to the IAH are based on an agreed profit-sharing
ratio and not at the discretion of the board of directors as in the case of
dividends paid to shareholders. Thus, IFIs require more disclosure of
income determination and distribution.
 In determining the net income earned from the mobilization of IAHs’
funds, all costs directly related to the mobilization of such funds need to
be taken into account and deducted. This includes the cost of financing as
well as related costs such as provisions for doubtful debts or loss of
financing. In addition, non-financing income, such as fee-based income,
could be allocated to IAHs subject to the approval of the Shari’a board or
committee that formulates opinions and rulings on such income.

INCOME DETERMINATION
 Appropriate disclosures has to made by IFIs for two methods of
income determination, namely, the separate investment
account (gross margin) method and the pooling method of
income determination.
 The investment account method distributes the gross profit
according to an agreed profit-sharing ratio between IAHs and
shareholders after deducting financing and related costs.
 The pooling method distributes the net profit according to an
agreed PSR between IAHs and shareholders, after deducting all
costs and including all income earned by the IFIs. An
Illustration of the two distribution methods practiced by IFIs is
presented below.

INCOME DETERMINATION
 The more prevalent method adopted by IFIs is the separate
investment account method, also described as the gross margin
method, compared with the pooling method as shown above.
 Consistent with the trustee profit sharing contract, IAH decisions are
only restricted to the effective and efficient mobilization of funds
and not the operational activities of the entrepreneur, that is, the
IFI. In other words, IAHs are passive partners in the Mudaraba. They
take no decisions and they do not interfere with the work of the IFI.
Effective and efficient mobilization of funds is the job of the
Mudarib (IFI). Hence profits due to be shared with an IAH only take
into consideration costs directly related to the fund within the
purview of the IAH. (Also Refer 3/1/2/2 of SS No. 40)

 In calculating the profit distributable to IAHs, there is a need
to determine the basis of allocation between the different
classes of IAHs of varying investment horizons. Several
allocation methods have been adopted by different IFIs.
These include policies based on a PSR, investment weights
and the timing of dividend declaration, as well as the period
of accruing the proposed dividends. Other institutions adopt
different PSRs for different time horizons. Some financial
institutions declare dividends on a monthly basis while
others accrue and declare at the end of an investment
period. In certain jurisdictions, such as Malaysia, prior to the
introduction of the rate of return framework, a single PSR
was used for all IAHs with varying weights for each
investment horizon. (Also Refer 5/1 of SS No. 40)

The following table derived from disclosure requirements as per FAS
No.5 and applied by some Islamic financial institutions, shows a form of
profit allocation model that could be adopted by an IFI.

For Unrestricted IAs, Disclosure should be made,
 In the note on significant accounting policies, of
the bases applied by the Islamic bank in the
allocation of profits between owners’ equity &
unrestricted IAHs.
the bases applied by the Islamic Bank for charging
expenses to unrestricted IAs.
the basis applied by the Islamic Bank for charging
provisions, in the parties to whom the revert once
they are no longer required.

Disclosure should be made,
 Of the total administrative expenses charged to
unrestricted investment accounts along with a brief
description of their major components based on
material significance of the amounts.
 Of the Percentages for Profit allocation between
owners equity and various unrestricted investment
accountholders which the Islamic bank has applied
in the current financial period.
 If the Islamic Bank has increased its percentage of
profits as a Mudarib, after fulfilling the necessary
Shari'a requirements.

Provision & Reserves
Presented By:

PROVISIONS
 A provision is a contra-asset an is constituted by
charges made as expenses against income.
 Provisions are of 2 types:
 Specific
 General
 Provisions of either type are made in relation to
receivables, financing and investment assets
incases were there is a doubt regarding the
collectability or an impairment of value.

ACCOUNTING ENTRY FOR PROVISIONS
* Contra-Assets
Dr
Cr
Provision for loss / Diminishing in value of Specific Asset (P& L)
Accumulated Provision for loss / Diminishing in value of Specific Asset (B/S)*

SPECIFIC PROVISIONS
 A Specific provision is an amount set aside to reflect an
estimated impairment of value of a specific type of assets.
 In the cases of receivables, the amount is that required to
write down the assets to its cash equivalent value, namely
the amount expected to be collected.
 In the case of financing and investment assets, it is the
amount needed to write the assets down to cash equivalent
value if this is lower than cost.

GENERAL PROVISIONS
 A General provision is an amount set aside to reflect a
potential loss that may occur as a result of currently
unidentifiable risks in relation to receivables, financing or
investment assets.
 The amount reflects estimated losses affecting these assets
attributable to events that have already occurred at the date of
the statement of financial position, and not estimated losses
attributable to future events.

RECOGNITION OF PROVISIONS
 A provision shall be recognized when information
becomes available to the Islamic Bank indicating that
an event resulting in, or that will probably result in,
the impairment of value of an asset.

MEASUREMENT OF PROVISIONS
SPECIFIC PROVISIONS
 A specific provision is measured as the amount needed to write the asset
down to its estimated cash equivalent value in the case of receivables and
incase of financing & investment assets to estimated cash equivalent value
if lower than cost.
 At the end of the financial period, the amount needed to bring the balance
of the specific provision in respect of such assets, finances by unrestricted
account holders funds and or shareholders funds, to the required level
shall be charged to the income statement. If the balance of the Provision
exceeds the required level, the amount needed to reduce it to the
required level shall be credited to income of the relevant party.

MEASUREMENT OF PROVISIONS
GENERAL PROVISIONS
 A general provision is measured as the amount estimated to be needed to
cover a potential loss that may occur as a result of currently unspecified
risks in respect of receivables, financing or investment assets.
of the general provision in respect of such assets, finances by unrestricted
account holders funds and or shareholders funds, to the estimated
required level shall be charged to the income statement. If the balance of
the Provision exceeds the required level, the amount needed to reduce it
to the required level shall be credited to income of the relevant party.

PREAENTATION OF SPECIFIC PROVISIONS

PREAENTATION OF GENERAL PROVISIONS
 A general provision shall be deducted from the total value of
receivables, financing and investment assets.

RESERVES
 A reserve is a component of equity (of either investment
account holders and / or shareholders) and is constituted by
appropriations made out of income.
 Followings are the examples of Reserves:
 Profit Equalization Reserve
 Investment Risk Reserve

PROFIT EQUALIZATION RESERVE
 This is the amount appropriated by the Islamic bank
out of the Mudaraba Income, before allocating the
Mudarib share, in order to maintain a certain level of
return on investment for investment account holders
and increase owners equity.

INVESTMENT RISK RESERVE
 This is the amount appropriated by the Islamic bank
out of the Income of investment accountholders, after
allocating the Mudarib share, in order to cater against
future losses for investment account holders.

RECOGNITION OF RESERVES
 Reserves are recognized when the management of the
Islamic Bank decides, with the approval of investment
account holders, to setup a profit equalization reserve
and or Investment Risk Reserve.

MEASUREMENT OF PROFIT EQUALIZATION RESERVES
 The PER shall be measured as the amount deemed prudent by the
management of the Islamic Bank in order to achieve the required
objectives.
of the reserve to the required level shall be treated as an appropriation of
income BEFORE allocating the Mudarib Share.
 If the balance exceeds the amount considered prudent then the excess
amount shall be credited as a release from reserve to the relevant parties
share of income for that financial period Before allocating the Mudarib
Share.

MEASUREMENT OF INVESTMENT RISK RESERVES
 The IRR shall be measured as the amount deemed prudent by the
management of the Islamic Bank in order to achieve the required
objectives.
of the reserve to the required level shall be treated as an appropriation of
income AFTER allocating the Mudarib Share.
 If the balance exceeds the amount considered prudent then the excess
amount shall be credited as a release from reserve to unrestricted
investment account holders share of income for that financial period
AFTER allocating the Mudarib Share.

PRESENTATION OF RESERVES
PER & IRR

Musharaka Financing
Presented By:

 This Standards Shall apply to Musharaka
financing transactions carried out by Islamic
banks whether by means of constant
Musharaka (Short term or long-term) or a
diminishing Musharaka (one which ends in
transferring ownership to one party)

Definition of Musharaka
 A form of partnership between the Islamic bank and
its clients whereby each party contributes to the
capital of partnership in equal or varying degrees to
establish a new project or share in a existing one, and
whereby each of the parties becomes an owner of the
capital on a permanent or declining basis and shall
have his due share of profits. However, losses are
shared in proportion to the contributed capital. It is
not permissible to stipulate otherwise.

Definition of Diminishing Musharaka
 It is a Musharaka in which the Islamic Bank agrees
to transfer gradually to the other partner its (the
Islamic Bank’s) share in the Musharaka, so that the
Islamic Bank’s share declines and the other
partner’s share increases until the latter becomes a
sole proprietor of the venture.

RECOGNITION OF ISLAMIC BANK’S SHARES IN
MUSHARAKA CAPITAL
 Islamic banks shall recognize in its books its
share of Musharaka capital “at the time of
funds period to the partner (i.e. counter party)
or when made available to partner”.

RECOGNITION OF ISLAMIC BANK’S SHARES IN
MUSHARAKA CAPITAL
 Following accounting entry will be posted in its
books.
Dr
Cr Bank / Cash / (ABC Company Account)
Musharaka Financing - (ABC Company)

MEASUREMENT OF ISLAMIC BANK’S SHARE IN
MUSHARAKA CAPITAL AT THE TIME OF
CONTRACTING
Amount of share paid in cash
 Musharaka financing will be measured as the amount paid or made
available to the partner.
Amount of share provided in kind (i.e. non monetary
assets or trading assets)
 Musharaka Financing will be measured at the fair value* of assets
(the value agreed by both)
* If the valuation of the assets results in a difference between fair value and book value such
difference shall be recognized as profit or loss to the Islamic Bank itself.

 Musharaka financing will be measured at the end of financial period
at historical cost (the amount which was paid or at which assets was
value at the time of contracting).
 Islamic bank’s share in diminishing Musharaka will be measured at
the end of financial period @ historical cost after deducting the
historical cost of any share transferred to the partner (such
transferring by means of a sale at fair value) . The difference
between historical cost & Fair Value shall be recognized as profit or
loss in the Islamic Bank’s Income Statement.

 If the diminishing Musharaka is liquidated before complete transfer
is made to the partner, the amount recovered in respect of the
Islamic bank’s share shall be credited to the Islamic Bank’s
Musharaka Financing Account and any resulting profit or loss,
namely the difference between the book value (of Musharaka
Financing account) and the recovered amount, shall be recognized in
the Islamic Bank’s Income Statement.
Dr Musharaka Financing - (ABC Company)

 If the Musharaka is terminated or liquidated and the Islamic bank’s
due share of the Musharaka Capital (taking account of any profits or
losses) remains unpaid when a settlement of account is made, the
Islamic Banks share shall be recognized as a “ Receivable due from
the partner ” .
Dr Musharaka Financing - (ABC Company)
Cr Receivable from the Partner (ABC Company)

PRESENTATION IN THE FINANCIAL STATEMENT

Mudaraba Financing
Presented By:

 This Standards Shall apply to Mudaraba financing transactions
carried out by Islamic banks as a provider of funds and transactions
related to Capital provided by Islamic Bank to be used in Mudaraba.
 This standard doesn’t address the following:
 The accounting treatment of Mudaraba transaction in the Mudarib (Client)
books as well as the Mudaraba books.
 The Islamic bank receipt of unrestricted investment accounts funds which are
characterized as Mudaraba from a Shari’a Perspective.
 The Islamic bank receipt of restricted investment account funds whether in its
capacity as Mudarib or agent.
 Zakah of Mudaraba fund.

Definition Mudaraba
 Mudaraba is a Partnership in profit whereby one party
provides capital (Rab al-maal) and the other party provides
labour (Mudarib)

RECOGNITION OF MUDARABA CAPITAL AT THE TIME OF
CONTRACTING
 Mudaraba financing capital (cash or in kind) shall be
recognized when it is paid to the Mudarib or placed
under his disposition.
 Mudaraba financing transactions shall be presented in
Islamic Banks financial statements under the heading
of “Mudaraba Financing”. Mudaraba capital provided
in the form of non-monetary assets shall be reported
as “Non Monetary Mudaraba Assets”.

MEASUREMENT OF MUDARABA CAPITAL AT THE TIME
OF CONTRACTING
 Mudaraba capital provided in cash by the Islamic bank shall be measured
by the amount paid or the amount placed under the disposition of the
Mudarib.
 Mudaraba Capital provided by the Islamic Bank in kind (trading assets or
Non-Monetary assets for use in the venture) shall be measured at the fair
Value of the assets (the value agreed between the Islamic Bank and the
client), and if the valuation of the assets results in a difference between
fair value and book value, such difference shall be recognized as profit or
loss to the Islamic Bank Itself.
 Expenses of the contracting procedures incurred by one or both parties
(e.g., expenses of feasibility studies and other similar expenses) shall not
be considered as part of the Mudaraba capital unless otherwise agreed by
both parties.

ACCOUNTING ENTRY OF MUDARABA CAPITAL
If Monetary Assets Provided
If Non-Monetary Assets Provided
Dr
Mudaraba Financing - (ABC Company)
Dr
Cr Trading Assets
Non-Monetary Mudaraba Assets - (ABC Company)

MEASUREMENT OF MUDARABA CAPITAL AFTER
CONTRACTING AT THE END OF FINANCIAL PERIOD
 Any repayment of the Mudaraba capital if any shall be deducted from the
Mudaraba Capital.
 If a portion of the Mudaraba Capital is lost prior to the inception of work
because of damage or other causes without any misconduct or negligence on
the part of the Mudarib, the such loss shall be deducted from the Mudaraba
Capital and shall be treated as a loss to the Islamic Bank. However, if the loss
occurs after inception of work it shall not affect the measurement of
Mudaraba Capital.
 If the whole Mudaraba Capital is lost without any misconduct or negligence
on the part of the Mudarib, the Mudaraba shall be terminated and the
account thereof shall be settled and the loss shall be treated as a loss to the
Islamic Bank.
 if the Mudaraba is terminated or liquidated and the Mudaraba Capital (taking
account of any profits or losses) is not paid to the Islamic Bank when a
settlement of account is made, the Mudaraba Capital (taking account of any
profits or loss) shall be recognized as a “receivable due from the Mudarib”.

PRESENTATION OF MUDARABA CAPITAL

Zakah
Presented By:

 This Standards shall apply to accounting treatment related to:
 The determination of Zakah base
 Measurement of items included in Zakah base
 Disclosure of Zaka in the Financial Statements of the Islamic Bank

DETERMINATION OF ZAKAH BASE
 The Zakah base shall be determined by using 2.5% for a lunar
calendar year and 2.5775% for a solar calendar based on either of
the following two methods . Net Assets, Net Invested Funds, it
should be noted that provided items are classified and valued
consistently with due considerations given to the different valuation
bases used in the two methods, both are strictly equivalent by virtue
of the statement of financial position identity.

DETERMINATION OF ZAKAH BASE
 The Zakah base shall be determined by using 2.5% for a lunar
calendar year and 2.5775% for a solar calendar based on either
of the following two methods.
 Net Assets Method,
 Net Invested Funds,
 it should be noted that provided items are classified and
valued consistently with due considerations given to the
different valuation bases used in the two methods, both are
strictly equivalent by virtue of the statement of financial
position identity

NET ASSETS METHOD
ZAKAT BASE
=
Asset subject to Zakah – (liabilities that are due to be paid
during the year ended on the date of statement of financial
position + equity of unrestricted investment accounts
+minority interest + equity owned by government +equity
owned by endowment funds + equity owned by charities +
equity belonging to not for profit organizations excluding
those that are owned by individuals)

ZAKAH BASE
 The Assets subject to Zakah include cash and cash equivalent, receivable net of
provisions for doubtful debts, assets acquired for trading (e.g. Inventory,
marketable securities, real estate… etc.) and financing assets (e.g. Mudaraba,
Musharaka, Salam, etc.) financing assets shall be net of provisions for fall in value
or non collectability. Funds used to acquire fixed assets relating to financing assets
shall be deducted.
 Assets acquired for trading shall be measured at their cash equivalent value on
the date on which the Zakah is due.
 In determining the assets subject to Zakah that are available for trading, either in
the form of agricultural products or livestock (camels ,cows ,sheep and goats)
consideration shall be given to the rates and nisab (minimum amount not liable to
the payment of Zakah) that are specified for such assets according to Shari’a.

NET INVESTED FUND METHOD
ZAKAT BASE
=
Paid up capital +reserves + provisions not deducted from assets + retained
earnings + net income + liabilities that are not due to be paid during the year
ended on the date of the statement of financial position – (net fixed assets +
investment not acquired for trading e.g. real estate for rent + accumulated
losses).

TREATMENT OF ZAKAH IN FINANCIAL STATEMENTS
 In any of the following cases, Zakah shall be treated as an
(Non-operating) expense of Islamic banks and shall be included
determination of net income in the income statement.
 When the law requires the Islamic bank to satisfy the Zakah obligation.
 When the Islamic bank is required by its charter or by-laws to satisfy
Zakah obligation
 When the general assembly of shareholders has passed a resolution
requiring the Islamic bank to satisfy Zakah obligation.
Dr
Cr Zakah Liability
Zakah Expense

CASES IN WHICH THE ISLAMIC BANK IS NOT
OBLIGED TO PAY ZAKAH
 In case some or all of the shareholders ask the Islamic bank to act as agent
in meeting the Zakah obligation relating to their investment in the Islamic
bank from their share of distributable profits , the Zakah shall be deducted
from the shareholders share of distributable profits.
 In case some or all the shareholders ask to the Islamic bank to act as agent
in meeting their Zakah obligations and the Islamic bank agrees to do so
even if there are insufficient distributable profits to meet the shareholders
obligations, the amount paid by the Islamic banks shall be recorded as a
receivable due from these shareholders.

CALCULATION OF ZAKAH THROUGH EXAMPLE

PRESENTATION OF ZAKAH IN THE FINANCIAL STATEMENT

Ijarah & Ijarah Muntahia Bittamleek
Presented By:

 This Standards shall address the accounting rules relating to Ijarah &
Ijarah Muntahia Bittamleek in which the Islamic Bank is a lessor or a
lessee including the acquisition of assets for Ijarah, Ijarah expenses,
revenues, gains & losses.

Definition Ijarah
 The term Ijarah as used in the standard means leasing of
property pursuant to a contract under which a specified
permissible benefit in the form of a Usufruct is obtained for a
specified period in return for a specified permissible
consideration.

CLASSIFICATION OF IJARAH
 Operating Ijarah (an operating Ijarah lease that does not include a
promise that the legal title in the leased asset will pass to the lessee
at the end of lease).
 Ijarah Muntahia Bittamleek (a lease that concludes with the legal
title in the in the leased assets passing to lessee).

IJARAH MUNTAHIA BITTAMLEEK
 Ijarah Muntahia Bittamleek includes :
 Ijarah Muntahia Bittamleek through gift
 Ijarah Muntahia Bittamleek through transfer of legal title (Sale) at
the end of lease for a token consideration or other amount as
specified in the contract
 Ijarah Muntahia Bittamleek through transfer of legal title (Sale) prior
to the end of the lease term for a price that is equivalent to the
remaining Ijarah instalments.
 Ijarah Muntahia Bittamleek through gradual transfer of legal title of
the leased asset.

Classification of Accounting Treatment
Operating Ijarah Ijarah Muntahia Bittamleek
Islamic Bank
Lessor Lessee
Islamic Bank
Lessor Lessee

OPERATING IJARAH IN THE FINANCIAL STATEMENT
OF ISLAMIC BANK AS LESSOR
ASSETS ACQUIRED FOR IJARAH
 “ Assets acquired for Ijarah shall be recognized upon acquisition &
measured at “historical cost”.
 “ Leased asset shall be depreciated on a basis consistent with the
Lessor’s normal depreciation policy for similar assets.
 “ Leased Asset shall be presented in the Lessor’s statement of
financial position (Balance Sheet) as “Investment in Ijarah Asset”.

IJARAH REVENUE
 “ Ijarah revenue shall be allocated proportionately to the financial
periods in the lease term.
 “ Ijarah revenue shall be presented in the lessor’s income statement
as “Ijarah revenue”

INITIAL DIRECT COST
YES NOMaterial
Initial Indirect cost incurred by
the lessor for arranging the
lease agreement shall be
allocated to the periods in the
lease term in a pattern
consistent with that used for
allocating Ijarah revenues.
Such costs shall be charged
directly in the income
statement as an expense to
the financial period in which
the lease agreement is made.

REPAIRS OF LEASED ASSETS
YES NOMaterial
If the repairs are material and
differ in amount from year to
year over the lease term, then
a provision for repairs* shall
be established by regular
charges against income.
* Not contra asset rather accumulation
of expense to release in future period
Such Repairs that are
necessary for securing the
service of the leased asset
shall be recognized in the
financial periods in which they
occur.

At the End of the Financial Period

OF ISLAMIC BANK AS LESSEE
IJARAH EXPENSE
 Ijarah Installments shall be allocated over the financial periods of
the lease term and shall be recognized in the financial period in
which they are due.
 Ijarah installment shall be presented in the lessee's income
statement as Ijarah Expenses.

OF ISLAMIC BANK AS LESSEE
INITIAL DIRECT COST
YES NOMaterial
Initial Indirect cost incurred by
the lessee for arranging the
lease agreement shall be
allocated to the periods in the
lease term in a pattern
consistent with that used for
allocating Ijarah expenses.
Such costs shall be charged
directly in the income
statement as an expense to
the financial period in which
the lease agreement is made.

IJARAH MUNTAHIA BITTAMLEEK IN THE FINANCIAL
STATEMENT OF ISLAMIC BANK AS LESSOR
IJARAH MUNTAHIA BITTAMLEEK THROUGH GIFT
Following items to be accounted for same as for operating Ijarah in the
financial statement of Islamic bank as lessor :
 Assets acquired for Ijarah
 Ijarah revenue
 Initial direct cost
 Repairs of leased assets
 Presentation at the end of the financial period
However, leased asset shall be presented in the lessor’s statement of financial
position under “Ijarah Muntahia Bittamleek Assets”

 At the end of the Ijarah term legal title of the leased assets shall pass to
the lessee, provided that all Ijarah instalments are settled.
 If the leased assets are permanently impaired before the legal title passes
to the lessee for no consideration and the impairment is not the result of
lessee’s action or omission, and the Ijarah installments already paid
exceeds the fair rental amount, then the difference between the two
amounts (namely what the lessee has paid towards the purchase of asset
and its fair rental value ) shall be recognized as liability due to lessee and
charged to the Income Statement. (Also Refer 8/8 of SS No. 9)

IJARAH MUNTAHIA BITTAMLEEK THROUGH SALE OF A TOKEN
CONSIDERATION OR OTHER AMOUNT AS SPECIFIED IN THE LEASE
 All the accounting treatment is same as for Ijarah Muntahia Bittamleek
through gift.
 At the end of the Ijarah term legal title of the leased assets shall pass to
the lessee, provided that all Ijarah instalments are settled & lessee
purchases the asset.

IJARAH MUNTAHIA BITTAMLEEK THROUGH SALE OF A TOKEN
CONSIDERATION OR OTHER AMOUNT AS SPECIFIED IN THE LEASE
Is the Lessee obliged to fulfill the
promise to purchase the leased asset
YES NO
If the Lessee decides not to purchase
the asset then asset shall be
recognized in the Lessor’s Balance
Sheet Under “asset acquired for
Ijarah” and valued at lower of CEV
or NBV. If the CEV is lower the
Difference between CEV & NBV shall
be recognized as loss.
If the Lessee decides not to purchase
the asset & CEV is lower than the
NBV, the Difference between CEV &
NBV shall be recognized “receivable
due from lessee”.

IJARAH MUNTAHIA BITTAMLEEK THROUGH SALE PRIOR TO THE END OF LEASE TERM
FOR A PRICE EQUIVALENT TO THE REMAINING IJARAH INSTALLMENT
through gift.
 Legal title of the leased assets shall pass to the lessee, when he buys the
leased asset prior to the end of lease term for a price that is equivalent to
the remaining lease installment.
 Islamic Bank shall recognize gain or loss resulting from the difference
between the selling price and NBV.

IJARAH MUNTAHIA BITTAMLEEK THROUGH GRADUAL SALE OF LEASED ASSET
through gift except the followings:
 Ijarah Revenue : Shall be recognized in the financial period in which it is
due, taking into consideration that the revenue shall be progressively
decreased as the lessee acquires a greater share of the leased asset.
 Repairs of leased assets : Repairs costs shall be born by both the lessor
and the lessee in proportion to the amount of their respective equity in
the asset.

STATEMENT OF ISLAMIC BANK AS LESSEE
 Indirect Cost : same as “Operating Ijarah in the financial statement of Islamic
bank as lessee”
 Ijarah Expense : same as “Operating Ijarah in the financial statement of Islamic
bank as lessee”
 Maintenance Expense : Where periodic & operating maintenance of the
leased asset is required to be paid by the lessee under the terms of the lease, the
resulting cost shall be recognized as an expense in the financial period in which
they occur.

 At the end of Ijarah term :
 Legal title of the leased asset shall pass to the lessee after all Ijarah installments are
settled.
 Asset acquired through gift at the end of the lease term shall be measured at its CEV at
that time. A corresponding credit is made to the source of funding from which the
Ijarah Installments were financed, whether it be equity holders (i.e. Retained Earnings),
IAH, or both. The lessee shall disclose its policy in this regard.

IJARAH MUNTAHIA BITTAMLEEK THROUGH TRANSFER OF LEGAL TITLE (SALE) AT THE
END OF THE LEASE FOR A TOKEN CONSIDERATION OR OTHER AMOUNT AS
SPECIFIED IN THE LEASE
bank as lessee”
bank as lessee”
they occur.

IJARAH MUNTAHIA BITTAMLEEK THROUGH TRANSFER OF LEGAL TITLE (SALE) AT THE
END OF THE LEASE FOR A TOKEN CONSIDERATION OR OTHER AMOUNT AS
SPECIFIED IN THE LEASE
At the end of Ijarah term :
 Legal title of the leased asset shall pass to the lessee when the later buys the asset
provided that all Ijarah installments are settled.
 Asset bought at the end of the lease term shall be measured at its CEV at that time. The
difference (CEV – Price mentioned in the lease contract) is credited to the parties that
financed the purchase.

IJARAH MUNTAHIA BITTAMLEEK THROUGH TRANSFER OF LEGAL TITLE (SALE) PRIOR
TO THE END OF THE LEASE TERM FOR A PRICE THAT IS EQUIVALENT TO THE
REMAINING IJARAH INSTALLMENTS
bank as lessee”
bank as lessee”
they occur.

IJARAH MUNTAHIA BITTAMLEEK THROUGH TRANSFER OF LEGAL TITLE (SALE) PRIOR
TO THE END OF THE LEASE TERM FOR A PRICE THAT IS EQUIVALENT TO THE
REMAINING IJARAH INSTALLMENTS
Purchased of the leased assets :
 Legal title of the leased asset shall pass to the lessee when the later buys the asset at a
price equivalent to the remaining Ijarah instalments.
 Asset bought prior to the end of the lease term shall be measured at its CEV at the time
of purchase. The difference (CEV – Purchase Price) is credited to the parties that
financed the purchase.

IJARAH MUNTAHIA BITTAMLEEK THROUGH GRADUAL TRANSFER OF LEGAL
TITLE (SALE) OF LEASED ASSET
bank as lessee”.
 Maintenance Expense : same as “Operating Ijarah in the financial statement
of Islamic bank as lessee”
 Ijarah Expense : Shall be recognized taking into consideration that the expense
shall be progressively increase as the lessee acquires a greater share of the leased
asset.

AAOIFI's CIPA Course Material - Prepared & Presented by Yasir Waseem

AAOIFI's CIPA Course Material - Prepared & Presented by Yasir Waseem

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