MIA Launches Free Textbook on Accounting for Islamic Finance
Professional Practices & Technical, Malaysian Institute of Accountants | June 22, 2020
Islamic finance is an emerging high-growth sector and a core economic differentiator for Malaysia. To help drive development, the Malaysian Institute of Accountants (MIA), led by the MIA Islamic Finance Committee and the Malaysian Accountancy Research and Education Foundation, recently launched a comprehensive and current textbook on accounting for Islamic finance.
The free textbook will bridge the knowledge gap and equip accountants working in Islamic finance to manage increasingly complex reporting standards and apply Malaysian Financial Reporting Standards (MFRS) for Islamic finance transactions. The textbook’s contents encompass assets, liabilities, equity, income, and expenses and disclosures in the financial statements of an Islamic bank, a takaful entity and an Islamic asset management company (AMC). MFRS are identical to the International Financial Reporting Standards in all respects other than the nomenclature.
“MIA is very proud to release this textbook as part of our integrated strategy to help develop competencies and capacity among accountants working in Islamic finance as well as Islamic financial institutions (IFIs). We trust that this will be a useful reference not only for IFIs in Malaysia but also for those in other jurisdictions. This in turn will strengthen Malaysia’s leadership and influence in the global Islamic finance sector,” said MIA CEO Dr. Nurmazilah Dato’ Mahzan at the launch in early 2020.
Reconciling IFRS and Islamic Finance Transactions: The Challenges
In applying MFRS to Islamic finance transactions, prior to Malaysia’s IFRS convergence in 2012, a number of implementation issues were identified. Among others, three core issues relate to whether the application of IFRS has any conflict with general Shariah (Islamic Law) principles or methodologies, explained Rasmimi Ramli, Deputy Executive Director, MIA Professional Practices and Technical. These are:
- Substance over form: whether the qualitative characteristic of “substance over form” may be applied in financial reporting from an Islamic perspective;
- The probability criterion: whether recognizing elements of the financial statement based on the probability criterion of “when it is probable that any future economic benefit associated with the item will flow to or from the entity” would be in conflict with general Shariah methodologies; and
- The concept of time value of money: whether the concept of “time value of money” is recognized in Shariah and can be applied to Islamic finance transactions.
Following consultation with the Shariah Advisory Council of Bank Negara Malaysia, it was concluded that generally accepted accounting principles or methods may be applied in financial reporting from an Islamic perspective as their application does not conflict with general Shariah principles or methodologies.
The textbook includes further discussion on the issues above as well as other implementation issues facing the industry.
The textbook covers the application of MFRS on Islamic finance transactions in Islamic banking, takaful entities and Islamic AMCs in Malaysia, and features a total of 15 chapters divided into four parts.
- Part I focuses on the background of Islamic finance development in Malaysia and offers a macro view of the industry, its history and prospects.
- Parts II to IV consists of 12 chapters that discuss the application of MFRS on assets, liabilities, income, expenses, and equity of Islamic banks, takaful entities and Islamic asset management companies (AMCs). The discussion on assets, liabilities and equity looks at definition/nature, recognition, and measurement as well as presentation and disclosure of the items in the financial statements of these entities.
- Parts II and III, which cover Islamic banking and takaful entities, also include preamble chapters on understanding Islamic banks’ and takaful entities’ financial statements. “Also included is a brief discussion on the future consideration of accounting standards for those entities, given the continuous development of the accounting standards affecting them,” said Rasmimi.
Within the 12 technical chapters, users will surely welcome the guidance provided on the standards that present the most difficulties for IFIs. For Islamic banks, the significant items in the financial statements of Islamic banks are “financing, advances and others” and “deposits from customers” which are financial assets and financial liabilities respectively, noted Rasmimi. “Accordingly, the most challenging MFRS for Islamic banks is MFRS 9, Financial Instruments. Similar to conventional banks, it was challenging to implement the impairment loss model in the Islamic banks,” she said.
In addition to the impairment loss model under MFRS 9, one of the key challenges for takaful entities to apply MFRS is “the regulator’s requirement for the takaful operators (TOs, equivalent to insurance companies) to present the assets and liabilities of the takaful funds (TFs, such as family fund and general fund) separately from the assets and liabilities of TOs,” explained Rasmimi further.
Another challenge is on the classification and measurement of Qard, a contract where the borrower should pay the full amount to the lender. In takaful operations, where assets of the takaful funds are insufficient to meet their liabilities, takaful operators are required to provide loans to takaful funds via Qard. The textbook provides understanding on how MFRS are applied on these areas, among others.
Free Downloads to Enrich Reference Materials, Build Competencies
The published textbook is available for free downloads by the public, including students and academicians, facilitating access to this textbook as a current reference material and encouraging paperless and borderless usage.
“Through this textbook, students will be able to acquire adequate understanding and knowledge of MFRS for Islamic finance transactions at the tertiary level, and they will be better prepared for the workplace as well in the future. Other than benefiting students, the book would also be a useful reference for the market, including MIA members and accountants working in the Islamic finance industry,” said Mohd Muazzam Mohamed, Chairman, Islamic Finance Committee, MIA, at the launch of the textbook.
Initial feedback from several academics has been positive. They welcome the textbook as a tool to facilitate teaching and sharing industry knowledge to prepare tertiary-level students for the workforce. Several organizations including Islamic banks and universities have requested hard copies to share with their Shariah advisors, clients, and as an easy reference for training and in library archives. The reception on social media channels has also been highly positive.
Added Value: A Tool for Sustainable Development
Other than providing guidance on financial reporting for Islamic finance practitioners and institutions, both Dr. Nurmazilah and Mohd Muazzam emphasized that the textbook and MIA’s efforts to upskill accountants in Islamic finance can drive sustainable development in the public interest. This is aligned with the global profession’s move to support sustainability as framed by the United Nations Sustainability Development Goals (UN SDGs).
“Sustainability encompasses a wide spectrum of issues that affect environment, society and governance (ESG), which are aligned with the ethics and values of Islamic finance. This Islamic finance accounting textbook will help improve the transparency and quality of financial reporting. In turn, such disclosures can lead to better actionable insights and decision making by the leaders of Islamic finance institutions, especially with regards to lending to optimize environmental and social impact, not just for profit maximization,” explained Dr. Nurmazilah.
MIA’s upskilling efforts and now this textbook will also help drive value-based intermediation, added Mohd Muazzam. “Bank Negara Malaysia is now championing value-based intermediation—where Islamic financial institutions are encouraged to assess how they create value and impact beyond profit, such as in encouraging sustainable business practices and greening the economy to fight climate change. Better transparency through better reporting can help Islamic finance institutions assess their impact and subsequently rewire their culture and practices to become more value-driven.”
Ultimately, MIA hopes that the textbook can be a tool for the greater harmonization of Islamic finance practices and reporting across the globe and enable greater transparency and trust in the institutions that practice and sell Shariah-compliant products by harmonizing the application of IFRS/MFRS.