12/8/2023

ACCOUNTING FOR ISLAMIC

BANKS

Financial Reporting Framework For

Islamic Financial Institutions

International Financial Reporting

Standards (IFRS)

Issued by International Accounting

Standards Board (IASB).

Used in more than 120 countries.

Voluntary adoption in Afghanistan

1
 12/8/2023

AAOIFI Financial Accounting

Standards (FAS)

Issued by the Accounting and

Auditing Organization for Islamic
Financial Institutions (AAOIFI).

Used for IFIs in Bahrain, Sudan,

Syria, Lebanon, Qatar, Oman.

Other standards

Local conventional standards, e.g. US

GAAP

Local Islamic standards, e.g. Pakistan &

Indonesia- Institute of Chartered
Accountants of Pakistan and Indonesian
Accounting Institute

2
 12/8/2023

POINTS TO PONDER

⚫ 1. Can Islamic financial transactions

be accounted for using IFRS?
⚫ 2. Do Islamic financial institutions
deserve a separate set of Islamic
accounting standards to report
Islamic financial transactions?

FINANCIAL REPORTING ENVIRONMENT

Islamic banking financial reporting

practices are subjected to the central
banks’ regulation in the respective
Muslim and non-Muslim countries

3
 12/8/2023

FINANCIAL REPORTING
ENVIRONMENT : Afganistan

LLC Law

Da Afghanistan Bank

IFRS (Voluntary)

Effort done in Malaysia

MASB

AAOIFI

Technical Releases

4
 12/8/2023

ACCOUNTING AND AUDITING ORGANIZATIONS OF

ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI)

Primary Purpose

⚫ To enhance the confidence of

users of the financial statements
of the IFIs and ultimately to
promote IFIs

Objectives

Develop accounting and auditing thought relevant

to IFIs

Disseminate accounting and auditing thought

relevant to IFIs

Prepare, circulate and interpret accounting and

auditing standards for IFIs

Review and amend accounting and auditing

standards for IFIs

10

5
 12/8/2023

ACCOUNTING AND AUDITING ORGANIZATIONS OF

ISLAMIC FINANCIAL INSTITUTIONS (AAOIFI)

History: established in 1991 –

agreement of association by IFIs
worldwide supported by IDB

Head office is in Bahrain

11

11

Organizational Structure – Supervisory

Committee; Financial Accounting Standard
Board; Executive Committee; Shari’ah
Committee

Funded by founding members of IFIs,

establishment of waqf etc.

12

6
 12/8/2023

AAOIFI’S Standards

1. Shari’ah standards – 54 Standards

2. Accounting standards - 31
3. Auditing standards - 5
4. Codes of ethics - 1
5. Governance standards - 13

13

13

OBJECTIVES OF ISLAMIC FINANCIAL

ACCOUNTING AND REPORTING

To determine rights and obligations of

interested parties

To safeguard entity assets and rights

of others

To contribute to enhancement of
managerial productive capacities

14

7
 12/8/2023

OBJECTIVES OF ISLAMIC FINANCIAL

ACCOUNTING AND REPORTING

To provide useful information to make

legitimate decisions

Shari’ah compliance

Distinguish prohibited earnings and

expenditure

15

OBJECTIVES OF ISLAMIC FINANCIAL

ACCOUNTING AND REPORTING

Present entity’s economic resources,

obligations and related risks

Determine Zakat obligations

Estimate cash flow and related risk

16

16

8
 12/8/2023

OBJECTIVES OF ISLAMIC FINANCIAL

ACCOUNTING AND REPORTING

Ensuring reasonable (or equitable)

rates of returns to investors

Disclose Islamic Bank’s discharge of

social responsibility (not as a
constraint but as a goal)

17

OBJECTIVES OF INTERNATIONAL FINANCIAL

REPORTING STANDARDS (IFRS)

To formulate and publish

accounting standards and
to promote their worldwide
acceptance

To work on the
improvement and
standardisation of
regulations, accounting
standards and procedures

18

18

9
 12/8/2023

OBJECTIVES OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS (IFRS)

Does not
believe that
different
nations should
have different
accounting
standards

19

DISCLOSURE REQUIREMENTS OF ISLAMIC

FINANCIAL INSTITUTIONS IN MALAYSIA

In September 2009, MASB issued

Statement of Principles i-1 (SOP i-1)
entitled Financial Reporting from an
Islamic Perspective that concludes
IFRS shall apply to Islamic financial
transactions in the absence of Shari’ah
prohibition to doing so 2
0

20

20

10
 12/8/2023

⚫ ForIslamic Financial Institutions,

Technical Release (TRi-3) on
“Presentation of Financial
Statements of IFIs” effective
beginning on or after 1 January
2010 is adopted in Malaysia

21

Financial Reporting and Presentation

⚫ Objective: Basis for presentation and

disclosure of financial statements of IFIs
that conduct Islamic banking activities.
⚫ To ensure comparability of these
statements with those in previous periods
and with those of other IFIs.
⚫ In addition, this Technical Release provides
guidelines for the structure, and basis of the
content of financial statements to ensure
conformity with Shari’ah requirements.
22

22

11
 12/8/2023

Cont’d

⚫ It also prescribes minimum disclosure

requirements.
⚫ The recognition, measurement, and
disclosure of specific Islamic-based
transactions and events will be dealt with
Islamic accounting pronouncements.

23

Financial Statements

⚫ AAOIFI FAS No. 1, a complete set of

financial statements including the
following components:
⚫ (a) Statement of financial position,
⚫ (b) Statement of comprehensive income,
⚫ (c) Statement of changes in equity,
⚫ (d) Statement of cash flows; and
⚫ (e) Notes to the accounts.
24

24

12
 12/8/2023

⚫ In addition to the above statements,

an Islamic Financial Institution may
to present, outside its financial
statements, any other statements
useful to users, for example, Zakat
Fund and Qard Fund.

25

IMPACTING THE NEED FOR ACCOUNTING

STANDARDS IN ISLAMIC BANKING

Developments of Islamic
Banking demand financial
reporting framework and
information useful for
investors and stakeholders.

26

26

13
 12/8/2023

Existing financial reporting

standards on conventional
financial institutions are not
adequate to address the
information needs of Islamic
financial Institutions.

27

Nature of Islamic banking emphasizes

importance of lawful and equitable banking
business and financial activities -

Require accounting treatment of unique

features of IFI activities

28

14
 12/8/2023

THANK YOU

29

29

15