Topic 1.2 Financial Reporting Framework

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
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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
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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
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FINANCIAL REPORTING
ENVIRONMENT : Afganistan
LLC Law
Da Afghanistan Bank
IFRS (Voluntary)
Effort done in Malaysia
MASB
AAOIFI
Technical Releases
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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
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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
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Organizational Structure – Supervisory

Committee; Financial Accounting Standard
Board; Executive Committee; Shari’ah
Committee
Funded by founding members of IFIs,

establishment of waqf etc.
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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
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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
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To provide useful information to make

legitimate decisions
Shari’ah compliance
Distinguish prohibited earnings and

expenditure
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Present entity’s economic resources,

obligations and related risks
Determine Zakat obligations
Estimate cash flow and related risk
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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)
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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
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OBJECTIVES OF INTERNATIONAL
FINANCIAL REPORTING STANDARDS (IFRS)
Does not
believe that
different
nations should
have different
accounting
standards
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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
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⚫ 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
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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.
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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.
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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.
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⚫ 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.
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IMPACTING THE NEED FOR ACCOUNTING

STANDARDS IN ISLAMIC BANKING
Developments of Islamic
Banking demand financial
reporting framework and
information useful for
investors and stakeholders.
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Existing financial reporting

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

importance of lawful and equitable banking
business and financial activities -
Require accounting treatment of unique

features of IFI activities
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THANK YOU
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12/8/2023

ACCOUNTING FOR ISLAMIC

Financial Reporting Framework For

International Financial Reporting

Issued by International Accounting

Used in more than 120 countries.

Voluntary adoption in Afghanistan

AAOIFI Financial Accounting

Issued by the Accounting and

Used for IFIs in Bahrain, Sudan,

Local conventional standards, e.g. US

Local Islamic standards, e.g. Pakistan &

⚫ 1. Can Islamic financial transactions

FINANCIAL REPORTING ENVIRONMENT

Islamic banking financial reporting

Effort done in Malaysia

ACCOUNTING AND AUDITING ORGANIZATIONS OF

⚫ To enhance the confidence of

Develop accounting and auditing thought relevant

Disseminate accounting and auditing thought

Prepare, circulate and interpret accounting and

Review and amend accounting and auditing

ACCOUNTING AND AUDITING ORGANIZATIONS OF

History: established in 1991 –

Head office is in Bahrain

Organizational Structure – Supervisory

Funded by founding members of IFIs,

1. Shari’ah standards – 54 Standards

OBJECTIVES OF ISLAMIC FINANCIAL

To determine rights and obligations of

To safeguard entity assets and rights

OBJECTIVES OF ISLAMIC FINANCIAL

To provide useful information to make

Distinguish prohibited earnings and

OBJECTIVES OF ISLAMIC FINANCIAL

Present entity’s economic resources,

Determine Zakat obligations

Estimate cash flow and related risk

OBJECTIVES OF ISLAMIC FINANCIAL

Ensuring reasonable (or equitable)

Disclose Islamic Bank’s discharge of

OBJECTIVES OF INTERNATIONAL FINANCIAL

To formulate and publish

DISCLOSURE REQUIREMENTS OF ISLAMIC

In September 2009, MASB issued

⚫ ForIslamic Financial Institutions,

Financial Reporting and Presentation

⚫ Objective: Basis for presentation and

⚫ It also prescribes minimum disclosure

⚫ AAOIFI FAS No. 1, a complete set of

⚫ In addition to the above statements,

IMPACTING THE NEED FOR ACCOUNTING

Existing financial reporting

Nature of Islamic banking emphasizes

Require accounting treatment of unique

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