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Development of illustrative financial statements for Islamic financial institutions

AAOIFI is consulting widely as it develops illustrative financial statements compliant with its proposed revisions to the relevant accounting standard.

Posted 30 January 2022

My page "AAOIFI Roundtable on planned revisions to its Financial Accounting Standard 1" recounted the meeting I attended in July 2021 with AAOIFI (the Accounting and Auditing Organisation for Islamic Financial Institutions) about their planned revision to a key accounting standard.

On 22 December 2021 I attended a follow up meeting based in Bahrain but conducted online to discuss how financial statements should look under the proposed revisions to the standard.

As a further illustration of how electronic meetings have changed the way that we work (changes that will continue long after COVID—19 is over), that same day I also spoke remotely in Saudi Arabia about corporate governance. See my page "The basics of corporate governance in 12 minutes."

I summarised both events in my January column in the magazine "Islamic Finance News." You can read it below.

A day spent virtually in the GCC

The widespread adoption of videoconferencing as a result of the coronavirus pandemic has made it much easier to pool widely dispersed expertise at minimal cost. The way I spent 22 December 2021 is a good example.

The morning was devoted to an online three-hour invitation-only roundtable meeting convened from Bahrain by AAOIFI. As I mentioned in my 4 August 2021 column, AAOIFI has been consulting industry participants about Exposure Draft F2/2020 proposing changes to AAOIFI’s Financial Accounting Standard 1 (“FAS 1”) ‘General Presentation and Disclosures in the Financial Statements of Islamic Banks and Financial Institutions’.

To continue that process, AAOIFI has produced illustrative financial statements for Islamic banks and similar institutions to show how they would look under the proposed revisions to FAS 1. They are extremely detailed; the draft version 27.4 supplied to roundtable participants was 57 pages long, even though it does not yet contain all of the risk disclosures normally needed in banks’ accounts.

While Exposure Draft F2/2020 is on the AAOIFI website as far as I can tell the illustrative financial statements were available only to roundtable participants.

As Islamic banks perform the same economic function as conventional banks (intermediating money between customers who have surplus funds which they wish to deposit / invest for shorter or longer periods with various risk profiles and customers who require short-term or long-term finance), I consider that Islamic banks’ accounts should:

  1. Look just like the accounts of conventional banks, since readers have the same information needs in both cases.
  2. In addition, contain disclosures which enable readers to understand how the bank has complied with the requirements of its Shariah Supervisory Board.

My personal perception is that AAOIFI has a similar view, and that this can be seen in the illustrative financial statements which any reader of conventional banks’ accounts would find very familiar.

In the afternoon I attended “The 3rd International Corporate Governance Conference” organised by the Corporate Governance Centre, Alfaisal University in Riyadh, Saudi Arabia, whose subject was “Effective Corporate Governance and the Independence of the Board Audit Committee.” It was a hybrid conference, with an auditorium but with some of the audience online, as were I and the other keynote speaker.

The way I came to speak illustrates the modern world. The Executive Director of the Corporate Governance Centre, Assistant Professor Dr Mashhour Mourad read my material on the internet, connected with me via LinkedIn, and then we got to know each other in a 1-1 Zoom meeting.

In my presentation, which is now available on my personal website, I set out to demystify corporate governance, and emphasized the major governance challenges that arise when there is a single shareholder who has effective control alongside a dispersed body of minority shareholders who have invested via a stock exchange.

The conference was not about Islamic finance, although I did answer a question from the Dr Mourad about how UK tax law has changed to facilitate Islamic mortgages.

However, Islamic financial institutions face the same governance challenges as conventional ones, compounded by the fact that most are based in OIC countries with under-developed governance codes and practices. In particular, when you see a bank (Islamic or conventional) which is part of a larger ownership group, be particularly cautious about governance.

Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.


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