ISLAMIC ACCOUNTING STANDARDS

ISLAMIC FINANCIAL STATEMENT

By: Dr. Dana AlZayani

Department of Islamic Banking
University of Bahrain
2021
• Various elements in the financial statements (i.e. assets,
liabilities, equity, income and expenses) must be identified,
recognized and measured in an appropriate manner for the
financial statements to provide a true and fair view of an
institution.
• Accounting recognition and measurement concepts provide
basic guidelines regarding the amount and timing to record
the components of the financial statements.
 What is recognition?
What is measurement?
 Recognition is the process of incorporating in the statement
of financial position or income statement an item that meets
the definition of an element and satisfies the following
criteria:
Recognition

An item that meets the definition of an element should be

recognized if:
o It is probable that any future economic benefit associated
with the item will flow to or from the entity; and
o The item has a cost or value that can be measured with
reliability.
 • Measurement is the process of determining the monetary
Measurement
amounts at which the elements of the financial statements
are to be recognized and carried in the balance sheet and
income statement.

• This involves the selection of the particular basis of

measurement i.e. historical cost, current cost, etc.
 • Historical cost: refers to the measure of value used in
accounting in which the value of an asset on the balance
sheet is recorded at its original cost when acquired by the
company.
Measurement
• Fair value: is the price that would be received to sell an
asset or paid to transfer a liability in a transaction between
market participants at the measurement date (Value of an
asset if it were sold in the open market).

• Cash equivalent value: The number of monetary units that

would be realized if an asset was sold for cash in the
normal course of business as of the current date.
 • A company acquires an asset in year 1 for BD100, the
asset is still held at the end of year 1, when its market
Measurement value is BD120, the company sells the asset in year 2 for
BD115.

• At the end year 1 the asset is recorded: BD100

• At the end of year 2 the asset is recorded: BD115
 • Financial statements are fundamental documents through
which an institution discloses information regarding its
Financial
financial performance and financial position.
statements

• Understanding of various statements in a set of financial

statements is important for users of such statements as
they are able to make an assessment of the institution’s
financial standing.
 A complete set of financial statements addresses the needs
of various users of financial statements. The set consists of
the following:

a. Statement of Financial Position

Financial b. Statement of Income
statements
c. Statement of Cash Flows
d. Statement of Changes in Owners' Equity
e. Statement of Changes in Restricted Investments
f. Statement of Sources and Uses of Funds in the Zakah and
Charity Fund
g. Statement of Sources and Uses of Funds in the Qard
Fund
h. Notes to the Financial Statements
What are the components of the balance sheet in IFIs that
follows Islamic accounting standards?
 • The Statement of Financial Position provides the financial
position of a financial institution at a specific point in time.
Statement of The basic elements of a statement of financial position are
financial position as follows:
1. Assets
2. Liabilities
3. Equity of unrestricted investment account holders and
their equivalents
4. Owner’s equity.
 Statement of
financial position
 • Assets are resources controlled by an IFI as a result of a
past transaction, event or condition which provides the IFI
an enforceable right over the resource and gives it an
economic benefit.

Example:
Asset
• Murabaha financing
• Ijarah financing
• Istisna’a financing
• Ijarah recievables
• Investment securities
• Trading securities
• Placements with financial institutions
 • Liabilities are present economic obligation that is
enforceable against the IFI. Liabilities result from past
transactions or other past events.
Liabilities

Example:
• Customers’ current accounts
• Borrowings from financial institutions
• Placements from financial institutions
 • Equity of unrestricted investment account are Funds
received for the purpose of investment on a profit sharing
Equity of
unrestricted or participation basis under Mudaraba arrangements.
investment
account • The investment accountholders provide economic
resources, usually cash, to the IFI for investment purposes
with the expectation of receiving attributable profits after
paying the IFI a share of the profit and a fee where
relevant.
 • Owners’ equity is the residual interest in the assets of the
IFI after deducting all its liabilities and amounts shown in
the balance sheet as equity of investment accountholders.
Owners’ equity

Example:
• Share capital (issued shares)
• Treasury shares
• Reserves
 The income statement reflects the financial performance of
an IFI over a certain period. Basic elements found in an
The income income statement are as follows:
statement

1. Revenue (Return on unrestricted investment accounts

and their equivalent)
2. expenses
3. Net income (net loss)
The income
statement
 Revenue is the value of all sales of goods and services
recognized by a company in a period.

Revenues
Example:
• Income from Murabaha financing
• Income from Musharaka financing
• Income from Ijarah Muntahia Bittamleek (net of
depreciation)
• Fees and commission income
 • An expense is the cost of operations that a company incurs
Expenses to generate revenue.

Example:
• Staff costs
• Depreciation
 • A statement of changes in owners' equity represents the
Statement of changes in the equity accounts during the period.
changes in
owners' equity
• Elements of statement of changes in owners’ equity:
o Net income (loss)
o Investment by owners and adjustments
o Distributions to owners
 • The statement of cash flows shows the sources and uses
of cash for the period.
Statement of cash
flows • The basic elements of this statement are:
o Cash flows from operations: These include cash inflows
and outflows as a result of transactions and other events
during the normal course of business whose effects are
reflected in the statement of income. They do not include
gains and losses resulting from the sale of assets acquired
by an IFI for its own use.
 o Cash flows from investing activities: These represent cash
inflows and outflows as a result of the acquisition or
disposal of assets for investment or cash flows resulting
from the sale of assets previously acquired by an IFI for
Statement of cash
investment or for its own use.
flows

o Cash flows from financing activities: These include cash

inflows or outflows as a result of investments made by
owners (share issue) or distribution to owners (dividends),
deposits or withdrawals by holders of unrestricted
investment accounts and their equivalent and deposits or
withdrawals by current, savings and other similar accounts.
 • A statement of changes in restricted investments
represents the changes in these equity accounts during the
period.

Statement of • Restricted investments are assets acquired by funds

changes in provided by holders of restricted investment accounts and
restricted their equivalent and managed by the IFI (as Mudarib).
investments

• Restricted investments should be disclosed in a separate

statement or disclosed as off- balance sheet item at the
bottom of the balance sheet BECAUSE the bank does not
have the right to use or dispose of those investments
except within the conditions of the contract between the IFI
and holders of restricted investment accounts. (the bank
cannot mix its fund with restricted investment funds).
Statement of
changes in
restricted
investments
Statement of
changes in
restricted
investments
 Funds provided by Rab al-maal are mixed with banks
own funds to be invested as per banks discretion.
Unrestricted
Investment
Account

Unrestricted Bank own

Investment Mixed fund
Authorization funds
Accounts

Invested in any project

chosen by the bank
 Funds provided by Rab al-maal cannot be mixed with
Restricted banks own funds.
Investment
Account

The bank invests the

Restricted
fund in a specific project
Investment
determined by the
Accounts
account holders.
 • The sources and uses of the Zakat funds statement is
prepared by companies authorised to collect Zakat and
distribute these funds as per the Sharia requirements.
Statement of • The basic elements of this are as follows:
sources and uses
of funds in the
Zakah and charity Sources of funds in the Zakah and charity fund
fund o Zakah is to be paid by all Muslims whose accumulated
wealth meets the criteria for the payment of Zakah.
Companies are also required to pay Zakah determined on
the basis of their net assets.
o Charity funds are funds donated directly by customers, or
funds that arise from certain transactions, including those
that a company cannot recognise as income, such as
penalties on loan default payment.
 Statement of
sources and uses Uses of the Zakah and charity fund
of funds in the
Zakah and charity The Zakah and charity fund is used for the financial
fund assistance and social uplifting of society, especially those in
need as per the teachings of the Holy Quran and is a
cornerstone objective of Islamic finance.
 Statement of
sources and uses
of funds in the
Zakah and charity
fund
 • The Fiqh definition of Qard is that it is a non-interest bearing
loan intended to allow the borrower to use the loaned funds for

Statement of a period of time with the understanding that the same amount
sources and uses of loaned funds would be repaid at the end of the period.
of Qard fund
• An IFI may organize a fund for Qard as a means of achieving
social objectives.

• The statement shows the sources and uses of a Qard fund

during the period.

• Sources can be internal or external.

 Statement of
sources and uses
of Qard fund
 Notes are an integral part of financial statements and usually
comprise of:
Notes to the
financial • a IFIs business overview
statements
• accounting policies used for preparation of financial
statements
• explanations and breakup of amounts disclosed in the
financial statements
• certain additional specialized disclosures (which are
not part of other statements but are necessary to
understand the financial performance)
 All the following are current assets except:
MCQ 1
a. marketable securities.
b. investments.
c. prepaid expenses.
d. cash.
 Obligations that will have to be paid within the current year
are classified as:
MCQ 2
a. fixed assets.
b. accrued expenses.
c. current liability.
d. long-term debt.
 All the following are classified as assets except:

MCQ 3
a. Current accounts
b. Salam financing
c. Investment securities
d. Murabaha receivables
 Notes to the financial statements compromise of:

a. Explanations and breakup of amounts disclosed in the

MCQ 4
financial statements.
b. Accounting policies used for preparation of financial
statements
c. All of the above
d. None of the above
 In Islamic banks, the penalties for late payments are
included in:

MCQ 5 a. Statement of financial position

b. Statement of income
c. Statement of sources and uses of Zakah and charity
fund
d. Statement of changes in owners' equity
Question 1 Mention/ Explain the special set of financial statements
used by IFIs that adopt Islamic accounting.
Question 2 Explain the component of the statement of sources and
uses of funds in the Zakah and charity fund