isra research paper.pptx

8/10/2019 ISRA RESEARCH PAPER.pptx

1/52

ISRA RESEARCH PAPER

Appraisal of the Principles Underlying IFRS Shariah

Perspective

Section1Group 9

Mohamad Aiman Bin Adnan 1114657Muhammad Syafiq Nazmi Bin Jasmi 1126433

Mohd Sharel Ishak Bin Ilyas 1120609

Ahmad Muzammil Bin MD Nor 1119359

Muhammad Syakir Bin Abdullah 1122541


2/52

INTRODUCTION


3/52

IASB

IFRS

MASB

MFRS

AAOFIFAS


4/52

QUESTION???

Does the accounting for Islamicfinancial transaction should also becoverage towards IFRS adoption1

Does the key principle under IFRSare acceptable form Shariahperspective?2

What is the main Shariah issuethat will arise in the application ofIFRS principle3


5/52

Asian- Oceania Standard Setters

Group

To discuss issue and share experience onthe adoption of IFRS of Islamic financialtransaction.

AAOSG Islamic Finance Working GroupTo facilitate the consideration and

application of IFRS by AAOSG members

Providing input and feedback to the IASB onthe adequacy and appropriateness ofproposed and existing IFRS to Islamicfinancial transaction and event


6/52

APPROACHES

1) Applying aseparate set of

Islamic accountingstandards

2) Applying IFRSalong with meeting

some additionalguidelines.


7/52

PRINCIPLES

IN IFRS


8/52

Substance over form

Time value of money

Fair value measurement

Recognition based on probability


9/52

Substance over form

Record a transaction based on its economic substance orfinancial reality & not necessarily on its legal form

Greater weight on economic substance for recognition andmeasurement.

It means that the end result of transaction is recorded.

If used SOF principle, IFI must distinguish between halal andharam contract

Suggestion:-

Repudiate SOF altogether and recognize the legal form in

financial statement

Measure the individual financial effects of each contractsas when it take places


10/52


11/52

Fair value measurement

Asset-the price of an asset at which that

assets could be bought or sell in a current

transaction between market participants in

the reference market.

Liability- The price at which liabilty could be

incurred or paid in a current transaction. Provides more relevant information to

investor


12/52

Fair value is determined using a

referenced market price

Factors:-

1) Cost of the assets

2) Supply vs demand

3) Individually perceived utility4) Risk characteristic


13/52


14/52


15/52

WORLDVIEW

APPROACHES

EXCLUSIVITY

APPROACH

HARMONIZATION

APPROACH

CONVERGENCE

APPROACH


16/52

EXCLUSIVITY APPROACH

Different world viewnot capitalist

Difference in objective- ACCOUNTABILITYTO ALLAH AND SHARIAH COMPLIANCE

Different function and contract Fundamental issue:-

1) Whether the aim of financial reportingof IFIs should simply be to provide

information to a wide range of users2) Whether the financial reporting of IFIsshould reflect their religious obligation


17/52

Reporting should be one channel to

indicate Shariah compliance

Must not report form of interest based

element


18/52

AAOFI

Difference recognition and measurementapproach of financial instrument and leases

Requires disclosure to convey Shariah complianceand provide guidance of certain unique items

Provision and contigent liabilities

Emphasise the legal forms of contracts approvedby its Shariah Board

Disclosure of unrestricted investment account No elaboration on how to determine fair value by

using estimation technique


19/52

HARMONISATION APPROACH

Compare the similarities and differences ofaccounting practices between nation

The process of bringing internationalaccounting standards into some sort ofagreement so that the financial statementsfrom different countries are preparedaccording to a common set of standard.

Litle attention had been given to the religion

factor Harmonizing IFRS standard and AAOFI

standards


20/52

CONVERGENCE APPROACH

Full convergence of accounting standards for

Islamic financial transaction with IFRS

Process of harmonising accounting standards

issued by different regulatory bodies

Examples :- MFRS-( SOP i-1)

Do not conflict with Shariah methodology

Conflict of Substance over form principle

Additional disclosure are required


21/52

EXCLUSIVITYAPROACH

Not really work

for dual bankingsystem

Requires originalIslamicaccountingstandards

HARMONISATIONAPPROACH

Only work in

practice injurisdiction wherecompliance withIFRS is stilloptional

Arise a

comparabilityissue atinternational level

CONVERGENCEAPPROACH

Best approach

when theconvergence ofIFRS had beenabide by law

Must includesadditional

disclosure


22/52

SHARIAH

PERSPECTIVE


23/52

1.Substance Over Form In principle, the Shariah emphasizes that

every contract must comply with its legal

formi.e., the essential requirements aswell as its nature and implication.

This implies that both the form and thesubstance of the transaction are important

Ijarah

Bay al-inah


24/52

Debates arise as to whether the effect ofeach contract in isolation is to be recorded,hence recognizing the form of each contract;

Or whether the overall economic effect of theseries of transactions is to be recorded, thusrecognizing the economic substance of theoverall transaction.

A third scenario would be to consider boththe form and the substance of a transactionwhen arriving at an opinion.


25/52

BANK

(Lessor)

PROPERTY

CUSTOMER

(Lessee)

(2) Bank leases property

(1) Bank buysproperty

AL- IJARAH

(3) Customer pays rental

Usually a promise

will be make to

transfer

the ownership ofthe asset to the

lessee at the end

of lease period

by Sale Contract


26/52

The financial statements will recognize only 1transaction, which is to account for the final

sale similar to the case of a conventionalhire-purchase agreement whereby the 2contracts of lease (hire) and sale (purchase)are combined into 1.

(1) Rental is recognized throughout the ijarahperiod.

(2) A sale is recognized when the contract totransfer the leased item is entered into.

If the principle of form over substance is used


27/52

The principle of substance over form in

Islamic law is derived from the legal

maxim that states:

This maxim stems from one of the five

major legal maxims:

In contracts, [primary] consideration is given to

intention and meaning, not to words and forms

(Haydar, 1991, Article No. 3).

Matters are determined by intentions (Haydar,

1991, Article No. 2).


28/52

Different view in Fiqh Mazhab

The majority of scholars, including the Hanafis,Malikis and Hanbalis adopted this principle.

Shafies scholars,however, disagreed; theyfavoured the principle of form over substance.

But they dont reject it , instead apply it on othercontract.For instance, Shafies legalised Bay alInah because he treated it as two separatecontracts.


29/52

The Reso lut ion of the Shar iah Adv isory Cou nc i l

(SAC) of Bank Negara Malays ia (BNM) on the

Principle of Substance ov er Form

Generally, the review made by the SAC of BNM doesnot perceive the concept of substance over form as

contradicting the principles of Shariah per se.

While it recognizes the importance of both substance

and form, in cases of conflict between the two, theSAC of BNM advocated the primacyof substance

over form.


30/52

2.The Time Value of Money

The Shariah does not totally disregard theconcept of the time value of money.

Ahmad and Hassan (2004) found fromtheir review of fiqh literature that timesmonetary valuation is not ruled out as long

as it is not based on a lending relationshipwhere it is claimed as a predeterminedvalue.


31/52

Scholars agreed that the time factor earns a

portion of the price in murabahah contractson the ground of mans natural preference forpresent consumption of money over futureconsumption.

As a result, Muslim scholars argued that thepresent is superior to the future and, hence,the present value of an asset should be

higher than its future value.

positive time preference


32/52

Consequently, if payment for an asset isdelayed to a specified time in the future,

the deferred price should be higher than

the spot price to strike a balance of benefit

in the contract of exchange and to uphold

justice (adl) between the contracting

parties.


33/52


34/52

Factors that allow time value of

money except for loan contract

Legitimacy of murabahah profits is that the

murabahah sale is based on an

underlying asset. Hence, it must be based on justice ,

concept of counter value whereas loan is

based on the principle of ihsan(benevolenc).

Other contract that support Time


35/52

Other contract that support Time

value of money :

Bay al salam

Bay al istisna Discounting when evaluating projects

under construction.

However


36/52

Opinion on uses of interest rate in

discounting process amongscholars

That interest isjust a benchmarkrate

Humaninnovations thatare not contraryto Islamicteaching

FavorZarqa (1983)proposed that therate of ROE beconsidered theproper discount

rate to be appliedto reflect theuncertain risks ofa projects cashflows

Oppose


37/52

Reso lut ions o f the SAC of BNM

on the Time Value of Money

Permissible only for exchange contracts that involve

deferred payment. However, the SAC prohibits the

charging of an extra sum for the deferred repaymentof qard (loan).

The SAC explained that the fuqaha had long

accepted that there is an economic value to time andquoted various classical statements permitting an

increase in value due to the lapse of time.


38/52

3.Fair Value Measurement

A hadith on the prohibition of severalforms of sales known to the medieval

Arabs whereby different ways of

manipulating market conditions take placeto affect the market priceindicates thatIslamic commercial transactions must becarried out based on fair value.

Talaqqi alrukban

Najash


39/52

Illustration on Mudarabah Contract

In a mudarabah contract, the subsistence(nafaqah) of the agent-manager while travelling ischargeable to the mudarabahaccount.

The possibility exists that an agent-manager couldcheats on his expenses to reduce the businessprofit.

Hence, the classical jurists unanimously agreedthat the determination of the subsistence shouldbe based on the fair value.


40/52

Determination of fair value

For rare commodity , require benchmarking

to the known price to get the equivalent price

(fair value).

Can be affected by certain circumstances

such as shortage of supply of goods due to

market manipulation, war and emergency.Therefore, Islamic law recognizes the role of

experts in determining the fair value.


41/52

Views on the use of discount rates

as an estimation technique

IFRS

Measurement of fair

value may require the use

of valuation techniques

which often make use of

discount ratesrather

than relying on quoted

market prices.

AAOIFI

In FAS 25, Investment inSukuk,Shares and Similar

Instruments, mentionstheuse of estimationtechniques to derive fairvalue when quoted pricesmay not be indicative of

fair value, but it does notelaborate further regardingthe permissibility of usingdiscount rates indetermining fair value.


42/52

Reso lut ions on Fair Value

The fatwa-issuing authorities in Islamic finance, such

as the OIC International Islamic FiqhAcademy and

the SACs of BNM, Kuwait Finance House, Dubai

Islamic Bank and al-Rajhi Bank have not yet issuedspecific fatwas relating to

(i) the principle of fair value,

(ii) the issue of discounting,

(iii) the use of an interest rate for discounting or in

valuation techniques for determining fair value


43/52

4.Recognition Based on

Probability

Examples of recognition based on probabilityin an IFI are:

(i) recognizing a liability for expected paymentsto murabahah account holders

(ii) recognizing murabahah receivables usingthe expected rate of profit

(iii)recognizing income and expenses based onexpected future cash flows


44/52

View on Recognition Based on

Probability Despite the emphasis on certainty, Islam

also recognizes uncertain circumstances.This is because, in reality, Muslims are

faced with many probable occurrences. Example :

Considering his capability to earn money,

he cannot be categorized as poorThe possibility of paying zakah before its

hawl (time of obligation).


45/52

Deduction from legal maxim

Concept of probability is accepted in

arriving at certain fiqh rulings.

However, the jurists emphasize the

concept of valid probability, which is

defined as events yet to occur that do not

contradict injunctions from the Quran and

Sunnah. Only record the highprobability to happen

event

The Resolution of the SAC of


46/52

The Resolution of the SAC of

BNM on Recognition Based on

Probability

The application of the probability principle in Islamic

financial reporting is permissible as it does notcontradict the general fiqh principles.

Legal maxim bases :

Consideration is given to the predominant and

widespread, not to the rare (Al-Zarqa, 1989)


47/52

Principles vs. Practice: Possible

Discrepancies?


48/52

IFRS standard that raise Shariah

concern Key areas relating to the operations of IFIs that

are not covered by IFRS, notably:

the classification and presentation of mudarabah

investment accounts in the financial statements

the accounting treatment of the profit equalizationreserve (PER) under mudarabah investmentaccounts

the requirement for additional disclosures such aszakah calculation, cleansing of Shariah non-compliant income, and Shariah compliance risk


49/52

Conclusion & Recommendation

The research is of the view that harmonization is the

most appropriate approach. But only work in practice

in jurisdictions where compliance with IFRS is stilloptional.

As for jurisdictions which have already converged

with IFRS, IFI need to include disclosures to the

accounts to explain the differences in the Shariah

treatment of the transactions


50/52

regulators in those jurisdictions should interact pro-actively with IASB to lobby for increased recognition

of Islamic financial transactions and seek solutions

for the Shariah issues arising with the application of

IFRS.

Recommends that IASB consider providing

guidelines on disclosure that reflect the Shariah-

based transactions and products that are utilized byIslamic financial institutions in their operations


51/52

It is noted that the MASB recommended that there

should be additional disclosures in the Notes to the

Accounts to describe the nature of relevant contracts

as applied by the IFIs

Example

must differentiate it from its conventional

counterpart through disclosure about its legal formin addition to its economic reality.


52/52

isra research paper.pptx

Documents