2020 will be remembered as an unprecedented year for the times to come due to the COVID-19 pandemic, very much like the way the year 1918 is remembered when the world faced the Spanish flu. The former is very much related to the latter in terms of the havoc it created for people, organizations and economies.
Like all organizations, operations at AAOIFI have been impacted; however, due to the nature of its work, it has been successful in containing the damage caused by the ongoing pandemic. In general, AAOIFI tried to ensure that the operational activities continued, including the development of standards and technical boards and subcommittee meetings being held as scheduled using web-based tools and advocacy and awareness programs.
In January 2020, after an extensive selection process by the AAOIFI nominations committee, the AAOIFI Board of Trustees announced the reconstitution of its three technical boards and appointed the respective members for the next four-year term. The formation of technical boards has taken into consideration the proper representation of the different sectors within the Islamic finance industry and of experts serving and supervising the industry, as well as the disciplinary backgrounds and work expertise of the members, in addition to geographical/regional representation. The technical boards have some of the most renowned Shariah scholars, leaders and experts in the Islamic banking and finance industry. Additionally, more than 30 working groups for various standards were formed with more than 100 members from the global Islamic banking and finance industry.
Since the reconstitution of the boards, several meetings have been organized through virtual meeting platforms to discuss various standards in the pipeline and to initiate new projects.
Table 1: Adoption status of AAOIFI standards |
||||||
Level of AAOIFI standards adoption |
No. of regulatory jurisdictions |
No. of countries |
||||
SHA |
ACC |
GOV |
SHA |
ACC |
GOV |
|
Full adoption |
19 |
23 |
18 |
16 |
17 |
15 |
Partial adoption |
3 |
5 |
7 |
2 |
5 |
7 |
Guidance/reference material |
9 |
7 |
8 |
9 |
7 |
8 |
Local standards based on AAOIFI standards |
2 |
4 |
3 |
2 |
4 |
3 |
Guidance & local standards based on AAOIFI standards |
1 |
2 |
3 |
1 |
1 |
2 |
Supplementary reporting |
0 |
1 |
1 |
0 |
1 |
1 |
Source: AAOIFI |
AAOIFI Shariah Board
Regarding the Shariah board, various standards are being discussed including debit cards, charge cards and credit cards, Sukuk, Ijarah and Ijarah Muntahiya Bil Tamleek and Ijarah Mawsufah Fi Dhimmah. It is expected that the debit card, charge card and credit card standards will be approved in 2021.
AAOIFI Accounting Board (AAB)
1. AAOIFI Accounting Board statement
In the light of the COVID-19 pandemic, the accounting board issued a statement with the objective to provide clarifications to Islamic financial institutions for the application of AAOIFI Financial Accounting Standards (FASs) considering certain pertinent issues arising due to economic factors and regulatory interventions in the wake of the COVID-19 pandemic. The statement addresses the issues related to payment moratoriums and deferment of payments and suspensions; settlement of a transaction with the execution of a new transaction can take different forms. Guidance is also provided in the treatment of government grants and subsidies whether it is for the support of the financial institution or to subsidize the profits charged to customers. Additionally, support and assistance are provided on the expected credit losses, impairment of assets, technical reserves and going-concern assumptions under uncertain conditions. The statement was issued to provide clarifications and interpretations on accounting treatments in line with the relevant FASs arising in these challenging times. The full statement can be accessed from the AAOIFI website.
2. Standards update
In addition, the AAB principally approved four final standards and one exposure draft, which will be issued after incorporating the board’s feedback. These are:
(a) FAS on ‘First time adoption of AAOIFI FAS Financial accounting standards’
The objective of this standard is to prescribe principles applicable to an Islamic financial institution (the institution) adopting AAOIFI FASs or applying them for the first time with regards to the transitional process, as well as to specify financial reporting requirements applicable to the first financial statements.
(b) FAS on ‘Waad, Khiyar and Tahawwut’
The standard aims at setting out principles for the classification, recognition, measurement with related presentation and disclosure of Waad, Khiyar and Tahawwut transactions. The standard reflects the different types mainly classified into two types — ancillary Waad or Khiyar and product Waad or Khiyar. The standard attempts to capture the practices and different forms entered into by Islamic financial institutions.
(c) FAS on ‘Financial reporting by Waqf institutions’
This standard aims to establish accountability and transparency of Waqf institutions in a suitable manner in compliance with Shariah principles and rules. This standard shall be applicable on all types of Waqf institutions and other institutions constituted on the concept of Waqf, and operating in line with Shariah principles and rules, irrespective of their legal status, including virtual Waqf institutions.
(d) The revised ‘AAOIFI Conceptual Framework for Financial Reporting’
The revised conceptual framework introduces the concepts and core principles underlying financial accounting and reporting by Islamic financial institutions and explains the relationships between these concepts, core principles and the objectives of financial reporting. It also prescribes and improves upon the existing accounting treatments in line with global best practices and supersedes the existing conceptual framework. The conceptual framework also serves as a reference point for selection and adoption of accounting policies for Islamic financial institutions in the absence of specific guidance under the FASs.
(e) The exposure draft on ‘Presentation and Disclosures in the Financial Statements of Takaful Institutions’
The accounting board of AAOIFI initiated a comprehensive revision project for the FASs on Takaful in 2018 under the recommendation of the FAS review and revision project. The first part of the deliverables of the Takaful project will be an exposure draft of the revised FAS 12 ‘General Presentation and Disclosures in the Financial Statements of Islamic Insurance Companies’. The second part of the project is expected to cover the specific requirements for accounting for Takaful that will replace the other three existing FASs, ie FAS 13, FAS 15 and FAS 19 on Takaful accounting. The exposure draft will be preliminary in nature due to the complexity of the project and will be re-evaluated once the second part of the project, relating to accounting treatments, is complete and comments from the market participants are received.
In addition, the following standards are in advanced stages and further progress will be achieved in 2021:
a) Revised FAS 1 general presentation and disclosure, and
b) AAOIFI FAS glossary and terminology project.
3. AAOIFI Technical Releases (TR) issued by the AAOIFI Technical Advisory and Interpretation Committee (TAIC)
• TR on ‘FAS1 Illustrative financials’, and
• TR on ‘Implementation guidance for FAS 31 ‘Investment Agency (Al-Wakala Bi Al-Istithmar)’.
4. Extension on adoption of AAOIFI standard in light of COVID-19
In the light of COVID-19 and the feedback received from stakeholders, the AAB decided to provide a one-year extension of the effective date of the recently issued AAOIFI FASs: from the 1st January 2020 to the 1st January 2021. However, the extension of the effective date shall not be applicable to institutions which have already completed the process of implementation, or where regulatory requirements do not allow such extension.
AAOIFI Governance and Ethics Board
1. Statement
In the light of the impact of the COVID-19 pandemic, the AAOIFI Governance and Ethics Board board felt the need to issue a guidance statement on the application of AAOIFI governance, ethics and auditing standards. The objective of this statement is to provide clarifications and interpretations as well as flexible options available for Islamic financial institutions to apply AAOIFI governance, ethics and auditing standards considering the challenges that the Islamic financial institutions are facing in different jurisdictions due to the role they have to play under the direction given by the respective governments and regulatory authorities to overcome the economic situation created by the COVID-19 pandemic. This statement further includes several recommendations for ethical responses by the businesses to the challenges posed by the pandemic. The full statement is available from the AAOIFI website.
2. Standards update
There are two governance standards in advanced stages of development:
a) Waqf governance
The standard has three main objectives: to promote and strengthen the core values of the Waqfs and their governance practices; to lay down key principles and concepts of Waqf governance based on best practices in governance, suitable to the specific nature of Waqf; and to enhance the confidence of the public and stakeholders in the institution of Waqf. It is believed that the implementation of good practices of governance of Waqf and Waqf-based institutions will in turn contribute toward improving the effectiveness and efficiency of Waqf operations and maximizing the revenues and return on the institutions’ assets in the short run, as well as toward their growth, perpetuity and sustainability in the long run.
b) Shariah decision-making
The objective of this standard is to set out a comprehensive framework for the Shariah decision-making (SDM) process for Islamic financial institutions, while complementing the AAOIFI Shariah standard (SS) 29 ‘Stipulation and Ethics of Fatwa in the Institutional Framework’. The standard shall apply to all Islamic financial institutions and other institutions regarding their respective SDM process, involving all governance organs, internal and external stakeholders, as well as the central Shariah boards.
Other governance board-related standards that are currently in different stages of development include:
a) Islamic crowdfunding
b) Shariah compliance and fiduciary rating for instruments, and
c) internal Shariah audit guidelines/handbook review of auditing standards.
Standards implementation
AAOIFI is delighted to publish the comprehensive AAOIFI Footprint Report 2020, which marks a key milestone since the establishment of AAOIFI in 1991. The e-copy of the report was launched on the 27th October 2020 at an exclusive event.
As per the report findings, the respective AAOIFI standards (Shariah, accounting, auditing, governance and ethics) are adopted or acknowledged in various forms by 27 countries and 40 regulatory jurisdictions. These include those that adopt either fully or partially, use them as guidelines/reference material or as a supplementary reporting basis or base their local standards/regulations on AAOIFI standards. A summarized version of the adoption status is in Table 1.
Besides the challenging times globally, AAOIFI continues to conduct exams for its professional qualifications in different parts of the world while ensuring the safety and health of all stakeholders. There are a total of 1,844 AAOIFI fellows, which include 1,141 CSAA fellows and 703 CIPA fellows, assuming important positions at various organizations in not fewer than 54 countries.
Additionally, AAOIFI conducted bespoke workshops virtually on various topics in Shariah, accounting, governance and ethics for the benefit of the Islamic finance industry globally.
Advocacy and awareness
The conferences and events AAOIFI organizes were impacted due to COVID-19; however, a forum on COVID-19 and its impact on Islamic finance was organized virtually in May, while the annual Shariah conference was organized in October 2020. Additionally, a launch event was also organized to launch the inaugural AAOIFI Footprint Report 2020 while the annual AAOIFI–IsDB conference is scheduled to take place in December 2020 virtually.
AAOIFI has already published one issue of its biannual journal, while the second will be issued before the end of 2020.
Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.
Dr Rizwan Malik is the senior manager of standards implementation and strategic development at the Accounting and Auditing Organization for Islamic Financial Institutions.