5 provisions made by Malaysia Accounting Standards Board (MASB I -1) to enhance the usefulness of presentation and disclosure of financial statement and accounting related information by Islamic banks and conventional banks that are involved in Islamic Banking Scheme in Malaysia [ (MASB I – 1) had been abolished ]

1.0       Introduction

It is widely accepted that the primary objective of accounting is to provide useful information to assist users in making economic decisions. Thus, it can be argued that accounting is therefore, a religious obligation. Hence, if accounting is a religious obligation, then the rules of accountability must be purely divine. In order to do so, appropriate accounting framework based on Shariah principles must be in place. The motivation for the development of Islamic accounting comes together with the emergence Islamic economic and Islamic resurgence for the last two to three decades.

The existing Financial Reporting Standards (FRSs), which have been developed in harmony with the International Accounting Standards (IASs), have not been able to address accounting issues within Islamic banking operations adequately. Fundamental differences in underlying principles, along with the distinctive nature of Islamic financial practices, have rendered many facets of many conventional accounting standards irrelevant to Islamic banking. Hence, the existing FRSs and IASs are useful in providing a structural framework for reporting, but they are inadequate to accommodate Shariah precepts, which form the basis of all Islamic transactions. The awareness for the need for Islamic accounting is due to basic building blocks of conventional accounting itself since the FRSs are based on interest-based elements. Because of the interest-based requirement, the conventional accounting adopts the ‘historical cost and conservatism concept’ in order to ensure whether the capital and interest are repaid. This is one of the elements embedded in the conventional accounting which is already violating the requirements of Shariah.

As an alternative accounting system, Islamic accounting is gaining more recognition, especially by Islamic countries. It is necessary to have Islamic accounting to be in place rather than conventional accounting in order to provide information on financial success in Islamic Financial Institutions (IFIs). The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was formed for this reason. To this date, AAOIFI has produced a set of Accounting Standards that could represent a benchmark framework that draws rationales from the Shariah.

On the other hand, the Malaysian Accounting Standard Board (MASB) has given careful consideration to the substance of the AAOIFI Standards in formulating its own Standard, MASBi-1: Presentation of Financial Statements of Islamic Financial Institutions. This Standard has been developed specifically to meet the needs of Islamic financial practices, and the regulatory as well as economic structure in Malaysia. In addition, MASB, in the process of developing Islamic Accounting Standards, has engaged in elaborate and rigorous ‘due process’ to elicit the views of practitioners, accountants, auditors, regulators and users of financial statements of Islamic financial institutions. The MASB takes cognizance of the fact that all its Standards are legally binding and has to ensure that the accounting standards it issues are enforceable without hindering the growth of IFIs. The MASB firmly believes that the issuance of Islamic accounting standards will guide IFIs, promote disclosure-based principles, enhances transparency, and help nurture the development of the Islamic capital market.

2.0      2.0  Distinctive provisions made in MASBi-1 to enhance usefulness of presentation and disclosure of financial statement and accounting related information.

            2.1       Fair Presentation and Compliance with FRSs - Departure from FRSs

Financial statements shall present fairly the financial position, financial performance and cash flows of an IFI. Te application of FRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. However, Paragraph 17 has been amended and Paragraph 17A-17E have been added to require an entity, in the extremely rare circumstances in which management concludes that compliance with a requirement in a Standard (MASBi-1) or the interpretation would be misleading that it would conflict with the objective of financial statements, to depart from the requirement unless departure is prohibited by the relevant regulatory framework. In either case, the entity is required to make specific disclosures.

            2.2       Information to be presented on Face of Balance Sheet or in Notes

Paragraph 40& 41 requires that IFIs to present additional line of items, headings and subtotals on the face of the balance sheet when such presentation is relevant to an understanding of the IFIs’ positions. The descriptions and the ordering items presented shall assist preparers in providing information that is necessary for the overall understanding of IFIs’ positions.

Paragraph 41 & 46 put emphasis on the asset side. For example, the cash balance of IFIs usually comprise of deposits made based on Shariah principle of Wadiah. The placement usually comprises money market placement made on the basis of Mudharabah principle. Dealing securities usually comprises equity and other capital market instruments acquired for trading purposes and investment securities are acquired for long-term investment purposes. The financing of customers usually comprises financing extended to customers based on various Shariah principles. Other items include receivables, statutory deposits with BNM and property, plant and equipment. Within each classification, distinction is normally made between types, nature and value of the assets in the notes. For example, in dealing securities, type of securities and impairment losses need to be disclosed. In the case of financing of customers, the example of disclosure would include analysis by product, by concept and by types of customers. Such distinction has reporting consequences in terms of classification of financing accounts.

Paragraph 42 & 47 put emphasis on the liability side of balance sheet. The liabilities of an IFI usually comprise deposits from customers, deposits and placement of other financial institutions, bills payable, and other liabilities. On the liabilities side, there still a need for full disclosure including analysis by product, by concept and by types of customers. Such distinction has reporting consequences in terms of classification of financing accounts. This disclosure is useful to users due to the unique features and associated risks of each type of contract. For example, Wadiah contracts guarantee safe custody of deposits. IFIs can decide on a discretionary share of income (hibah) to be paid to the depositors. Mudharabah deposits are profit sharing deposits where the profit paid is based on a pre-agreed sharing ratio. Their risk profiles are different. Other forms of liabilities are those that are based on Wadiah contracts.

Paragraph 43 states that, in the case of conventional banks and other financial institutions that carry out Islamic Banking Scheme (IBS), funds allocated for the IBS operation is normally disclosed as a separate item after all liabilities of the IBS. The nature of the funds is such that it is deemed to be an advanced from the IFIs for purposes of establishing the scheme.

            2.3       Information to be presented on face of Income Statement or Notes

Paragraph 51 requires that the income statement to have additional lines, headings and subtotals to be presented when such presentation is relevant to an understanding of the IFIs’ financial performance. In addition, the descriptions and the ordering of items presented shall assists preparers in providing information that is necessary for the overall understanding of an IFI’s financial performance. Such descriptions and ordering may be made in order to apply more specific requirements of regulatory authorities.

The income of an IFI includes income derived from an investment of depositors’ funds, income derived from the investment of shareholders’ funds (in the case of conventional banks or other financial institutions carry out IBS, income derived from investment of Islamic banking capital funds), income attributable to the shareholders (in the case of conventional banks or other financial institutions carry out IBS, income attributable to the bank/ group), and other income. Income derived from investment of depositors’ funds comprise all income from investment of general investment deposits, specific investment deposits and other depositors’ fund. Embedded in this are portions of income attributable to depositors. Income derived from investment of shareholders’ funds usually comprises income from financing, trading and investment activities, which comes from dealing and investment securities in and outside Malaysia.

Paragraph 54 put emphasis on the expenses in the income statement. The expenses of an IFI usually comprises allowances for loans and financing, expenses directly attributable to the investment of the depositors and shareholders/ Islamic banking capital funds, personnel expenses and other expenditure. Allowance for loan and financing comprise specific and general allowance as well as bad debts recovered and written-off during the financial year. Othe expenditure includes Shariah committee members’ remuneration, hire of equipment, general administrative expenses and other expenses. IFIs shall presents in the notes, an analysis of income according to types of investments and financing of customers. IFIs shall also present in the notes, an analysis of expenses using a classification based on either the nature of expenses or their function within the IFIs, whichever provides information that is reliable and more relevant.