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    CH 09 Accounting For Investment

    Uploaded by

    MOHAMMAD BORENE

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pptx, pdf, or txt
    of 15

    Chapter 9 - Accounting for

    Investment
    Introduction

     The AAOIFI FAS 17 shall apply to the institution’s investments, whether in the
    form of direct investment funds or investment portfolios, in sukuk (Islamic
    bonds), shares, and real estate.

     AAOIFI FAS 17 classifies Islamic bonds (sukuk) into at least four types:
    (a) Mudarabah (Muqaradah) sukuk
    (b) Musharakah sukuk
    (c) Ijarah sukuk
    (d) Salam or Istisna’ sukuk
    (a) Mudarabah (Muqaradah) sukuk

     These are investments in sukuk that represent ownership of units of equal value
    in the Mudarabah equity and are registered in the names of holders on the basis
    of undivided ownership of shares in the Mudarabah equity and its returns
    according to percentage of ownership of share.

     The owners of such sukuk are the Rab Al-mal (capital provider).
    (b) Musharakah sukuk

     These are investments in sukuk that represent ownership of Musharakah equity.


    It does not differ from the Mudarabah sukuk except in the organization of the
    relationship between the parties issuing sukuk forms a committee from the
    holders of the sukuk who can be referred to in investment decisions.
    (c) Ijarah sukuk

     These are sukuk that represent ownership of equal shares in a rented real estate or
    the usufruct (benefit) of the real estate. These sukuk give their owners the right
    to own the real estate, receive the rent and dispose of their sukuk in a manner that
    does not affect the right of the lessee, i.e. they are tradable. The holders of such
    sukuk bear all cost of maintenance of and damage of the real estate.
    (d) Salam or Istisna’ sukuk

     These are sukuk that represent a sale of a commodity on the basis of deferred delivery against immediate
    payment. The deferred commodity is a debt in-kind against the supplier because it refers to a commodity
    which is accepted based on the description of the seller.

     The Istisna’ sukuk is similar to Salam sukuk, except it is permissible to defer payment in an istisna’
    transaction, but not in a salam.
    Classification of Investment

     One notable contribution of AAOIFI FAS 17 is the classification of investment in sukuk into
    three types namely:

     For trading purpose

     Available for sale

     Held to maturity.

    The basis of AAOIFI classification is based on the well-known Shari’ah classification of trade
    commodities for the purpose of zakat.
    Contd.

    For example, the jurists of Maliki School have classified trading assets into the

    following:

    (a) assets that are meant for buying and selling;

    (b) assets that are held for sale in the expectation of making profits through price

    appreciation in the future

    (c) assets acquired not for trade, but for personal use.
    Accounting Recognition Requirements

    AAOIFI’s FAS 17 has recommended that recognition for investment in sukuk and shares shall
    be recognized on the acquisition date and shall be measured at cost.

    However, at the end of accounting period, investment in sukuk and shares held for trading
    purposes and available for sale shall be measured at their fair value.

    The unrealized gains and losses as a result of re-measurement need to be recognized in the
    income statement.
    Contd.

     Any unrealized gain or loss resulting from re-measurement at fair value, according to AAOIFI FAS 17
    shall be recognized in the statement of financial position under the “investment fair value reserve”.

     This reserve account will reflect the net gain or loss at the end of the year.

     The standard also makes a provision that in case the institution has reserves created by appropriation of
    profits of previous financial periods to meet future investment risks,

     It is recommended that unrealized loss resulted from re-measurement of investment at fair value shall be
    deducted from this reserve.
    Accounting Measurement Issues

     In the case of sukuk held to maturity, it needs to be measured based on historical cost

    except that if there is impairment in value it should be measured at fair value.

     The difference in value will then need to be recognized in the income statement and the

    information related to the fair value is then need to be disclosed in the notes to the financial

    statements.

     For securities held for trading and available for sale, AAOIFI FAS 17 recommends the

    measurement to be based on fair value.


    Contd.

     Fair value is normally defined as the amount which the instrument could be exchanged or settled
    between knowledgeable and willing parties in an arm’s length transaction, other than forced or
    liquidation sale.

     Quoted market price, when available, normally are used as the measure of fair values.

     The objective of Islamic valuation should be to provide both relevant and reliable value that can be
    relied on by users of financial statements to make useful judgment and decision.
    Contd.

     The AAOIFI’s FAS 17 also prescribes that the realized profits or losses resulting from sale of
    any investment shall be measured at the difference between the book value and the net cash
    proceeds from the sale of investment.

     The standard also makes recommendation that different types of investment must be shown
    separately according to the three classifications as defined earlier.
    Contd.

     In the case of dividends received from investment in shares and sukuk, the standard
    requires it to be recognized in the income statement at the declaration date rather than at
    the date when the cash proceed is received. This indicates the use of accrual basis of
    accounting, to ensure that the institution recognized income when it is realized based on
    the contract or the right to receive that income.

     The use of accrual here is required in order to reflect the actual or fair income at that point
    when it is realized.
    Accounting Disclosure Requirements

     AAOIFI’s‫المية‬7‫ة اإلس‬7‫ات المالي‬7‫ة للمؤسس‬7‫بة والمراجع‬7‫ة المحاس‬7‫ هيئ‬FAS 17 has made special requirements of
    disclosure in the case of investments in shares and sukuk.
     Among the requirements are that disclosure shall be made by the issuer of sukuk, if material, the
    face value of sukuk, the percentage of sukuk acquired from each party issuing the sukuk and
    each type of sukuk.
     There is also a requirement to disclose the party guaranteeing the sukuk and the nature of the
    guarantee.
     Another useful disclosure requirement is the need to disclose the contractual relationship
    between the issuer and/or manager of sukuk and the holders of such sukuk.
     The additional disclosure with respect to investment in sukuk is the requirement to disclose the
    classification of sukuk according to their maturities.

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