The global accounting scene has witnessed dramatic developments in less than a year, mainly in the aftermath of the COVID-19 outbreak and its widespread economic impact on economies and societies, and multiple sectors and industries worldwide, including the Islamic finance industry which was not spared. AAOIFI staged a timely reaction by issuing guidance (AAOIFI Accounting Statement on ‘Accounting implications of the impact of COVID-19 pandemic’ (21st May 2020)) relating to the implementation of financial accounting standards in the pandemic era.
AAOIFI also embarked on a comprehensive project to review and revise its financial accounting standards (FASs), particularly those that were issued a long time ago and have not undergone any revisits. A major part of the project focused on AAOIFI’s financial reporting conceptual framework and financial accounting standard (1) on general presentation and disclosure in the financial statements of Islamic financial institutions (both form part of the comprehensive review/revision project and are targeted for release in 2020).
Furthermore, and in the fourth quarter of 2020, the project of developing a full set of standards for Waqf (in areas of Shariah, governance and accounting) has culminated with the issuance of a Waqf FAS, constituting a full circle approach for developing standards on a given product/transaction in the three areas of standards development altogether.
Review of 2020
In the very wake of the pandemic outbreak, AAOIFI commenced its close monitoring of the unprecedented situation and its economic implications, and by the end of the first quarter felt the need to provide guidance to the institutions operating in the Islamic finance industry to tackle the challenge of presenting their financials in an objective and faithful manner as the economic repercussions kept unfolding, especially given the distinct nature of Islamic financial institutions as compared with their conventional counterparts in many aspects, including the existence of multiple stakeholders who share the profit or loss of the institution, and that all transactions are solely based on trade, leasing or partnership. Accounting treatments, in turn, are meant to always reflect this reality, particularly at times of complex and unusual events.
While all FASs remain applicable, the statement encouraged Islamic financial institutions to provide additional disclosures on a voluntary basis to enable users of the financial statements to better comprehend their financial position and performance. It also provided guidance on the departure from any treatment prescribed by FASs, due to regulatory requirements, with a complete disclosure of the affected transactions if departure did not take place. Otherwise, the validity of an entity’s statement of compliance with FASs has to be examined.
The scope of this statement is limited to providing clarifications and interpretations of FASs and the framework in respect of certain significant accounting issues that may be affected, including payment moratoriums and deferment, settlement of a transaction with the execution of a new transaction, government grants and subsidies, interest-free loans and zero-return repo by regulators, expected credit losses relating to receivables and off-balance sheet exposures, impairment of assets (eg non-monetary assets), significant and prolonged declines in value of investments held at fair value through equity, an entity’s going concern assumption and technical reserves.
Overall, the statement requires additional and adequate disclosures and careful reconsideration of management’s judgment and assessment of assumptions.
As part of the broader mission of AAOIFI FASs, which extend to include financial reporting for the institutions of the broader economy, the Waqf FAS has been developed with the aim to prescribe comprehensive accounting and financial reporting requirements for Waqf and similar institutions including general presentation and disclosures, specific presentation requirements and the key accounting treatments specific to Waqf institutions.
The standard aims to bring about better comprehension of information included in the general purpose financial statements and to enhance the confidence of the stakeholders in Waqf institutions, consequently improving the effectiveness and efficiency of Waqf operations, maximizing the benefits to beneficiaries, ensuring proper accountability and management, while maintaining (and if possible, expanding) the Waqf corpus and sustainability of the Waqf institutions.
Preview of 2021
In 2021, the newly issued standards (eg Waqf, Khiyar, Waad, Tahawwut, FAS1 and the framework, among many others) are expected to have a profound impact on financial reporting by Islamic financial institutions, whether relating to improved treatments and disclosures, or the introduction of new principles and guidance in areas not covered before.
A number of other standards have reached the stage of exposure draft (such as Takaful) and are expected to appear in 2021. The review/revision of existing FASs will also continue unabated, including for standards covering established modes of finance/investment like Mudarabah/Musharakah, Salam and Istisnah, among others.
In short, 2021 will be another eventful year for AAOIFI as a standard-setter and for institutions and jurisdictions adopting its FASs and financial reporting framework.
Islamic accounting has made a quantum leap, particularly in the past few years, both in terms of the wider coverage of issues and treatments and the improvement of existing treatments, all in line with good practices and within the boundaries of Shariah. The driving force behind that has always been market needs as well as accommodation to the very nature of Islamic finance transactions and instruments. As ever, this distinct sphere of accounting has been around to cater to the information needs of a specific host of stakeholders driven by Shariah compliance and optimally by Shariah supreme objectives.
The unique reporting requirements of Islamic financial institutions as well as the areas where no specific global standards are there to account for financial reporting for particular modes of finance and investment, including those with social impact (like Waqf), mean that Islamic financial accounting standards still stand on a solid raison d’etre and value proposition, and will always do.