CHAPTER I

GENERAL DESCRIPTION OF THE COMPANY

1.1 Company History

The Malaysian Accounting Standards Board (MASB) is established
under the Financial Reporting Act 1997 (the Act) as an independent authority
to develop and issue accounting and financial reporting standards in Malaysia.
The MASB, together with the Financial Reporting Foundation (FRF),
make up the frameworks for financial reporting in Malaysia. These
frameworks comprises an independent standard-setting structure with
representation from all relevant parties in the standard-setting process,
including preparers, users, regulators and the accountancy profession.
The functions and powers of the MASB as provided under the Act are
to:
issue new accounting standards as approved accounting standards;
review, revise or adopt existing accounting standards as approved
accounting standards;
amend, substitute, suspend, defer, withdraw or revoke any approved
accounting standards in whole or in part;
issue, approve, review, revise, amend, substitute, suspend, defer,
withdraw or revoke any issues bulletin in whole or in part;
issue, approve, review, revise, amend, substitute, suspend, defer,
withdraw or revoke any statement of principles, any technical and
other releases and any other document relating to financial reporting by
whatever name called in whole or in part;
sponsor or undertake development of possible accounting standards;
collaborate with other national and international accounting standard-
setters and monitor the development of other national and international
accounting standards;

1
 participate in and contribute to the development of a single set of
accounting standards for international use;
conduct such public consultation as may be necessary in order to
determine the contents of accounting concepts, principles and
standards; develop a conceptual framework for the purpose of
evaluating proposed accounting standards;
make such changes to the form and content of proposed accounting
standards as it considers necessary;
monitor the operation of approved accounting standards to assess their
continued relevance and their effectiveness; and
to perform any other function conferred or imposed upon it by the Act
or such other function as the Minister of Finance may prescribe by
order published in the Gazette.

MISSION
The MASB's mission is to develop and promote high quality
accounting and financial reporting standards that are consistent with
international best practice for the benefit of users, preparers, auditors and the
public in Malaysia. In a wider context, the MASB seeks to participate in and
contribute to the development of a single set of financial reporting standards
for international use.
In the pursuit of its mission, the MASB is guided by a clear set of
policy objectives:
a. to develop high quality, clear and enforceable national accounting and
financial reporting standards that benefit users, preparers, auditors and
the public.
b. to participate in and contribute to the International Accounting
Standard Boards (IASB) standard-setting process in the development
of a single set of accounting and financial reporting standards for
international use.

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 c. to promote the use and seek views on the application of accounting and
financial reporting standards by way of engagement and dissemination
of information to users, preparers, auditors and the public.
d. to collaborate with other national standard-setters for the development
of international accounting and financial reporting standards; and
e. to promote and support research in the area of financial reporting, in
particular, for emerging markets and Islamic markets.

MEMBERS OF THE MALAYSIAN ACCOUNTING STANDARDS

BOARDT

The MASB is made up of eight (8) members who are appointed by the
Minister of Finance. It comprises the Chairman of the MASB, the Accountant-
General and six (6) other members who posses knowledge and experience in
the matters of financial accounting and reporting, and in one or more of the
fields of accountancy, law, business and finance. In addition, the Minister of
Finance has appointed three (3) advisors to the MASB, one each from the
Bank Negara Malaysia, the Securities Commission and the Registrar of
Companies.

The members of MASB are:

Encik Mohamed Raslan Abdul Rahman (Chairman) - Partner, KPMG

Malaysia
Dato' Che Pee Samsudin - Accountant General of Malaysia
Datuk Tong Poh Keow - Group Chief Financial Officer, Sime Darby
Berhad
Mr Tan Soo Yan - Partner, Ernst & Young
Mr Chan Kam Chiew - Partner, KPMG
Mr Thaya Sangara Pillai - Partner, PricewaterhouseCoopers
Prof Dr Maliah Sulaiman - Professor, International Islamic University
Malaysia

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 Mr Pushpanathan Kanagarayar.

ADVISORS
Ms Jessica Chew Cheng Lian - Bank Negara Malaysia
Mr David Yap Weng Seong - Registrar of Companies
Mr Eugene Wong Weng Soon - Securities Commission.

1.2 Company Status

MASB an accounting standards board in Malaysia.
The Malaysian Accounting Standards Board was established in 1997
with objective of improving the quality of external financial reporting in
Malaysia. Previously, two professional bodies, the Malaysian Institute of
Accountants (MIA) (the accountants' national body) and the Malaysian
Institute of Certified Public Accountants (MICPA) (a private institution)
carried out the task of setting accounting standards in Malaysia. This study
investigate the standard setting arrangements in Malaysia and the roles of the
accounting profession in the standard setting process, for the period between
1997-1999. Two research strategies were used to gather the data needed,
documentary analysis and survey questionnaires. The results show that the
standard setting arrangements in Malaysia are similar to the arrangements in
other developed countries, particularly USA. Similarities include a standard
setting body with a parent organisation, a rigorous 'due process' that is
followed before an accounting standard is issued, and the development of
conceptual framework. There are also characteristics that are unique to
MASB. The MASB is to a greater extent, strongly influenced by the
government, through the Malaysian Finance Ministry. MASB's approved
accounting standards are based on the International Accounting Standards
(IASs), and customised to meet the unique Malaysian economic environment
and needs. There is also emphasis on study on implementation of Islamic
Financial Reporting in Malaysia. The status of the MASB as an independent

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sole authority to set the accounting standards was accepted by the interest
groups in Malaysia with mixed feelings. When the proposal to establish the
Board was announced, there was quite strong opposition from some
accountants. They argued that the Board should come under the jurisdiction of
the national professional body, the MIA. Other interest groups were more
positive, but quite uncertain of the future body's capability to enforce the
accounting standards. Nevertheless, views gathered after the formation of the
Board were divided. Generally, all agreed to have an independent body to
develop the accounting standards in Malaysia. They viewed that with various
inputs put into the standard setting process, and a strong legal backup for the
enforcement of the standards, the MASB has done a pretty good job. The
MASB has also in its more than two years existence as a standard setting
body, apart from reviewing extant and developing new accounting standards,
managed to come up with proposal on Malaysian own conceptual framework
and participate actively in international standard setting. The professional
bodies, MIA and MICPA and the accounting profession as a whole could be
said to be important players in the standard setting process still even though
the job is solely rest on the MASB shoulder. The accounting profession made
up the majority members on the Malaysian Financial Reporting Foundation
(FRF) and the MASB. They also involved in the Working Groups set up by
the MASB to carry out the development of accounting standards, contributed
actively for the comments on the discussion documents and exposure drafts
issued by the MASB, and participated in standard setting at the international
level. The MIA and MACPA also provide interpretations and guidelines on
how to apply the approved accounting standards to the accountant members.
The accounting profession is seen by various interest groups as the 'best man'
still to do the standard setting job, along with other MASB's constituents.

1.3 Organizational Structure and Description Company

MASB Profile

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1. ENCIK MOHAMED RASLAN ABDUL RAHMAN
Chairman, Malaysian Accounting Standards Board
Encik Raslan, a graduate of University of Melbourne with a
Bachelor of Commerce, is a Fellow Member of the Institute of
Chartered Accountants in Australia, former Vice President and Council
Member of the Malaysian Institute of Certified Public Accountants
(MICPA), former Council Member of the Malaysian Institute of
Accountants (MIA) and has chaired its disciplinary and investigation
committees, and Associate Member, Malaysian Institute of
Cooperative & Management Accountants (ICMA). Encik Raslan was
also an EXCO member and Treasurer of TI-Malaysia. He is a partner
of KPMG since 1994 carrying out audit and advisory work.
2. DATO' CHE PEE BIN SAMSUDIN
Accountant General Of Malaysia
Dato' Haji Che Pee bin Samsudin was appointed as Accountant
General of Malaysia on 5 January 2015. He was born in Kampung
Sungai Layar Hujung, Sungai Petani, Kedah Darul Aman in 1957. He
is a Chartered Accountant under the Malaysian Institute of
Accountants and graduated from Universiti Kebangsaan Malaysia with
a Bachelor of Accounting with honours in 1981.
He began his career as an Administrative Officer in Bank
Negara Malaysia in 1981, before being offered to serve under the
Accountant Generals Department of Malaysia (AGD). Started as an
accountant in AGD Kuala Lumpur, he was then transferred to the
Jabatan Agama Islam Wilayah Persekutuan Kuala Lumpur before
being appointed as the Treasury Accountant in AGD Perlis. He has
also worked in the Accounting Development Division in AGD,
Treasury Budget Division and he was then seconded to the Langkawi
Development Authority (LADA). His experience as an accountant in
an agency of the Ministry of Finance has allowed him to be seconded

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 to Institut Kefahaman Islam Malaysia for 6 years, before serving at the
Economic Planning Unit in the Prime Ministers Department for two
years. Dato' Haji Che Pee was subsequently appointed as Treasurer of
Kedah from 2001 to 2010.
His appointment as the Director of Central Operation and
Agency Services Division (BPOPA) in 2010 was the best platform that
showcased his leadership qualities and as an efficient administrator,
before being appointed as the Accountant General of Malaysia. In
addition, he also sits on a number of boards such as Amanah Raya
Berhad, Kumpulan Wang Amanah Pencen, Inland Revenue Board of
Malaysia, Malaysian Institute of Accountants and the Malaysian
Accounting Standards Board (MASB).
3. DATUK TONG POH KEOW
Group Chief Financial Officer, Sime Darby Berhad
Datuk Tong, 60, is the Group Chief Financial Officer of Sime
Darby Berhad. Sime Darby is a Malaysia-based diversified
multinational involved in key growth sectors, namely, plantation,
property, motors, industrial equipment, energy & utilities and
healthcare. She was the Chief Financial Officer of the Plantation
Division of Sime Darby Berhad prior to her present appointment in
June 2008 and prior to November 2007, she was the Chief Finance
Officer of Kumpulan Guthrie Berhad (KGB).
Datuk Tong is a member of the Malaysian Institute of
Accountants, a member of the Institute of Chartered Secretaries and
Administrators United Kingdom and a Fellow of the Association of
Chartered Certified Accountants, United Kingdom.
4. MR TAN SOO YAN
Partner, Ernst & Young
Mr Tan Soo Yan is the Professional Practice Director of Ernst
& Young Malaysia in the Assurance and Business Advisory Division.

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 He is also the Country Independence Leader. His responsibilities
include oversight of the Assurance Quality & Risk Management
policies and procedures, including client and engagement acceptance,
engagement quality reviews and resolution of complex accounting and
auditing matters. He is also involved in development and training of
assurance personnel on new auditing and accounting standards as well
as sharing quality improvement ideas.
Mr Tan has 38 years of experience in providing various types
of Assurance and Business Advisory Services. His portfolio of clients
includes banking, manufacturing, real estate and construction, retail &
consumer products and concessionaire companies.
He is a member of the Malaysian Institute of Certified Public
Accountants, Malaysian Institute of Accountants, MIA Ethics Board
and Sloan Fellow of London Business School 1986/87.
5. MR CHAN KAM CHIEW
Partner, Kpmg
Mr Chan Kam Chiew is a Partner and an Audit and Accounting
Committee member at KPMG Malaysia, a member of the MIA and the
MICPA.
He joined KPMG in 1984 and was on secondment to KPMG
San Francisco from 1991 to 1993. He is the audit engagement partner
for a wide range of public listed companies and multinationals in
various industries including those in the chemical, electronics, retail,
industrial products, consumer products and automotive products. He is
well-versed with multinational audits including those whose parent
entities are based in Europe and the United States of America. He has
managed special assignments including IFRS, flotation exercises,
financial due diligence reviews, provision of financial advisory
services and reviews of policies and procedures.
6. MR THAYA SANGARA PILLAI

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 Partner, Pwc
Mr Thaya is a Partner in the Assurance practice at
PricewaterhouseCoopers Malaysia, a Fellow of the ICAEW, a member
of the MIA and the MICPA.
He has over 30 years of experience in providing audit and
business advisory services to clients in a wide range of industries. His
portfolio of clients includes major public listed companies involved in
power, telecommunications, automotive, property development and
manufacturing sectors. Thaya has also led cross border assignments.
Other than statutory audits, he has led numerous assignments on
financial due diligences, mergers & acquisitions, initial public
offerings, finance function effectiveness and other advisory work.
7. PROF DR MALIAH SULAIMAN
Professor Of Accounting, International Islamic University Malaysia.
Dr. Maliah Sulaiman, a Fellow of the Association of Chartered
Certified Accountants (UK), holds a PhD from the University of
Otago, New Zealand. She is currently a Professor of Accounting at the
Department of Accounting, International Islamic University Malaysia.
She started her career as an audit semi senior at a public accountants
firm in Malaysia and later joined academia. She was a Chief Assessor
for the Ministry of Higher Educations Quality Assurance exercise and
sits on the Panel of Assessors for the National Accreditation Board of
the Bachelor of Accounting programs in Malaysia. She is also a
member of the committee on Material Flow Cost Accounting of the
Standard Industrial Research Institute of Malaysia (SIRIM).
Dr Maliah is also a recipient of two prestigious awards: the
Japan Society for the Promotion of Sciences Fellowship (JSPS-VCC)
in 2003 and the Association of Commonwealth Universities
Fellowship (ACU) in 2006. She sits on the editorial boards of various
international and national journals. Her current research interests are in

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 Environmental Accounting and Islamic Accounting. The International
Federation of Accountants (IFAC), New York, awarded her with the
Article of Merit Award in 2007 for her work on Environmental
Management Accounting. Most recently, in 2013, her work on
Corporate Governance of Islamic Financial Institutions in Malaysia
was awarded a Bronze medal by the Malaysian Institute of
Accountants.
8. MR KEN PUSHPANATHAN
Mr Ken Pushpanathan retired as a Partner of Ernst & Young,
Malaysia on December 31, 2009. He is currently an independent non-
executive director and Chairman of the audit committees the Asian
Institute of Finance Berhad, Bursa Malaysia Berhad, IJM Corporation
Berhad and IJM Plantations Berhad as well as an independent non-
executive director of Avicennia Capital Sdn. Bhd., Sun Life Malaysia
Assurance Berhad and Sunlife Malaysia Takaful Berhad.
He is the immediate past President and Council Member of
MICPA and a Board Member of MASB as well as the Honorary
Secretary of the Financial Reporting Foundation. He also serves as a
member of the Listing Committee of Bursa Malaysia.
He serves on various committees of MASB, MICPA and MIA.
He was the Chairman of MICPAs Financial Statements Review
Committee and Project Chairman of the Insurance Standards Working
Group of MASB on FRS 4. He also headed the MICPA Working
Group, which undertook a revision of the specimen financial
statements of Model Insurance Berhad.
He has served as an inaugural member of the International
Federation of Accountants (IFACs) Developing Nations Permanent
Taskforce for 2004/2005. He has been actively involved in the
National Annual Corporate Report Awards (NACRA), which is jointly

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 organised by MICPA, MIA and Bursa Malaysia, as Chairman of the
Adjudication and/or Organising Committees from 2003 to 2009.
9. MS JESSICA CHEW CHENG LIAN
Assistant Governor Bank Negara Malaysia.
Ms Jessica Chew is currently an Assistant Governor at Bank
Negara Malaysia. Ms Jessica has over 20 years of experience in
financial sector supervision and regulation with the Bank. She is
currently responsible for financial regulation covering the banking and
insurance sectors, and money services business. Her responsibilities
include the development of prudential financial policies for the
financial sector, financial surveillance, consumer and market conduct
regulation and oversight over the regulation and supervision of money
services business activities.
Ms Jessica holds a Bachelor of Commerce Degree with a major
in accounting and finance from the University of Melbourne, Australia.
She also currently serves as an adviser member of the Malaysian
Accounting Standards Board (MASB) and is a board member of
Agensi Kaunseling dan Pengurusan Kredit (AKPK)/Credit Counselling
And Debt Management Agency (CCDMA) and FAA.
10. MR DAVID YAP WENG SEONG
Suruhanjaya Syarikat Malaysia.
Mr. Yap Weng Seongis a Fellow Member of the Association of
Chartered Certified Accountants, United Kingdom and a member of
Malaysian Institute of Accountants. He also holds the Certification in
Training certificate awarded by Pembangunan Sumber Manusia
Berhad and Certificate IV in Training and Assessment awarded by
Management Consultancy International Pty Ltd, Australia.
Mr. Yap started his career with an international firm
specialising in audit, accounting and business advisory services.
Thereafter he joined the Royal Malaysian Customs in the Licensing

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 and Enforcement Sections before returning to the private sector as a
Financial Controller where he gained valuable knowledge and skills in
the areas of administration, finance and accounting. He subsequently
joined the Inland Revenue Board of Malaysia (LHDNM) to further his
career.
During his career with the Inland Revenue Board of Malaysia,
he had wide exposure and knowledge in personal and corporate tax, tax
audit, withholding tax and compliance tax at the Corporate Tax and
Withholding Tax Sections. He was also appointed by LHDNM to
conduct civil proceedings in Malaysian courts pursuant to the Income
Tax Act 1967.
Mr Yap has more than 27 years of working experience in a
wide range of industries and is presently the Head of Statistics and
Accounting Development Unit in the Corporate Development and
Policy Division of Suruhanjaya Syarikat Malaysia.
11. MR EUGENE WONG WENG SOON
Securities Commission Malaysia.
Eugene Wong is the Executive Director of Corporate Finance
& Investments Business Group, Securities Commission Malaysia
("SC") and is responsible for all matters pertaining to for issues and
investments, which include issuances of equity and debt securities,
corporate transactions, take-overs and mergers, collective investments
schemes and investment products.
Encik Eugene is a Council Member of the Malaysian Institute
of Accountants and currently serves as the Chairman of the Ethics
Standard Board.
Encik Eugene has worked for a merchant bank, a stockbroking
firm and in the audit and corporate finance divisions of international
accounting firms. He is also a member of the Malaysian Institute of
Accountants, Fellow of the Institute of Chartered Accountants in

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 Australia and Fellow of CPA Australia. He holds a Bachelor of
Commerce from the University of Melbourne.
1.4 Company Activities
Outreach Activities - Archive

Date Description
2014
24 Nov 4th Islamic Finance Master Class
19 Nov IASB - MASB Outreach Meeting: Reporting the Financial
Effects of Rate Regulation
25 Sep Accounting, Politics and the Global Financial Crisis by Sir
David Tweedie
05 Sep IASB Consultative Group on Shariah-compliant Instruments
and Transactions Meeting
13 Aug Audit Committee Breakfast Series: Financial Reporting
1 Jul IASB - MASB Outreach Meeting: Financial Instruments -
Impairment
30 Jun - 1 Jul IFRS for SMEs Train the Trainers Workshop
26 Jun Outreach Meeting on Revenue
23 Jun Outreach Meeting on Agriculture
Jan - Apr MASB Monthly Teleconference on MFRS Framework
Feb - Nov Roundtable on Financial Reporting Framework
2013
25 Nov Meeting with ICAEW President, Martyn Jones
21 Nov 3rd MASB Islamic Finance Master Class
03 Oct Outreach on the new Revenue Standard
03 Oct Outreach on the Revised Exposure Draft on Leases
20 Aug IASB Outreach on Insurance Contracts
Jun - Jul Public Forums on Roadmap for Private Entities Financial
Reporting Framework

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2012
09 Nov 2nd MASB Islamic Finance Master Class: Reporting Under
IFRS
11 Oct IASB Outreach Meeting: Post-implementation review of
IFRS 8
15 Aug MASB Field Test: Future of Financial Reporting for Private
Entities
30 Mar IASB Outreach Meeting: Revenue Recognition
28 Mar IASB Outreach Meeting: Users and Investors
28 Mar 2012 IFRS Conference: Kuala Lumpur
27 Mar IASB Roundtable on Exposure Draft Investment Entities
2011
30 Nov - 1 Dec Comprehensive Overview of Standards
13 May Sharing Session on IAS 41 Agriculture Fair Valuation of
Biological Asset
04 May Master Class on Applying IFRS to Islamic financial
transactions
03 May Briefing session on bond and sukuk valuation by BPA
Malaysia and MASB
10 Mar Briefing session on IASB Supplemental Document to the
November 2009 IASB Exposure Draft on Financial
Instruments: Amortised Cost and Impairment
2010
23 Nov Meeting with ISRA on Islamic Financial Transactions
16 Nov Meeting with Financial Institutions on IASB ED on Leases
08 Nov FASB & IASB Discussion Forum on IASB ED on Revenue
from Contracts with Customers
22 Oct Meeting with GLCs on Upcoming Changes to FRSs
08 Oct IASB-MASB Discussion Forum on IASB ED on Insurance
Contracts

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07 Oct IASB-MASB Discussion Forum on IASB ED on Revenue
from Contracts with Customers, Leases, Consolidation &
Investment Entities
30 Sep MASB Forum on IASB ED on Revenue from Contracts with
Customers
09 Sep Meeting with Regulators on MASB ED 74 Reduced
Disclosure Requirements
07 Sep Meeting with REHDA on IASB ED on Revenue from
Contracts with Customers
01 Sep Meeting with PLCs on MASB ED 74 Reduced Disclosure
Requirements
26 Aug Meeting with AIBIM, MIBA, ABM, CTIM on Tax
Implication of FRS 139
17 Aug Forum with Real Estate Housing Developers Association
(REHDA) on IFRIC 15Agreements for the Construction of
Real Estate
09 Aug Meeting with REHDA on IC Interpretation 15
14 Jul Meeting with PLCs on MASB ED 72 FRS for SMEs
05 Jul Meeting with Universities on Accounting for Islamic
Transactions
14 Jun Meeting with Preparers on IC Interpretation 4
19 May Meeting with REHDA on IC Interpretation 15
14 May Sharing session with Kevin Stevenson, Chairman of the
Australian Accounting Standards Board on IASB ED
Financial Instruments: Amortised Cost and Impairment
28 Apr Meeting with Investment Holding Companies on FRS
Implementation Issues
09 Apr Meeting with public listed companies auditors on FRS 139
06 Apr Meeting with Financial Institutions on FRS 139
01 Apr Meeting with Simon Archer on Islamic Banking and

15
 Finance
25 Jan Forum on MASB ED 69 Financial Instruments & IASB ED
on Financial Instruments: Amortised Cost & Impairment
Apr - Jul Public forum on MASB ED 72 FRS for SMEs
2009
30 Dec Special Meeting on IC 12
24 Nov Meeting on Takaful Accounting Issues
23 Nov FRS139 Meeting with Local Financial Institution
05 Oct Seminar on The Challenges of Implementing FRS 139
18 Sep Special Meeting on IFRIC 15
18 Aug Special Meeting with Financial Institution
25 Jun Forum on DSOP-i
25 Jun MASB Public Forum: Financial Reporting from Islamic
Perspective
15 Jun Public Forum on IASB Draft Technical Pronouncements
04 Jun Special Meeting on IC 12
29 Apr MASB Conference: Accounting Challenges in Turbulent
Times
20 Mar Special Meeting on IASB ED10
2008
Oct - Nov Roadshow on Convergence with IFRS
2007

11 Apr Dialogue on Proposed Amendments to 10 Financial

Reporting Standards

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 CHAPTER II
PROBLEMS AND EXPLANATION

2.1 The development of Islamic Accounting Standards MASB

The MASB has had a project on Islamic financial reporting since its
founding in 1997. The initial sentiment was that a separate, stand-alone set of
Islamic standards was necessary to satisfactorily report Islamic transactions
and events; and in 2001, the standard MASB i-1 (later re-numbered FRS i-1),
Presentation of Financial Statements of Islamic Financial Institutions, was
issued.
However, subsequent staff research appeared to indicate that much of
the conventional accounting concepts and generally accepted accounting
principles could be applied to Islamic financial transactions and events albeit
with additional disclosures to explain the use of Islamic contracts. Indeed,
even MASB i-1 (FRS i-1) was largely a reiteration of requirements already
found in FRS 101, Presentation of Financial Statements, and FRS 108,
Accounting Policies, Changes in Accounting Estimates and Errors.
As a result of staff research and other consultations, namely with the
Shariah Advisory Council of Bank Negara Malaysia, the MASB ceased its
policy of issuing Islamic accounting standards. It may instead issue other
documents that discuss the application of MASB approved accounting
standards to Islamic transactions. These documents, however, are neither
standards nor interpretations to standards.
On 15 September 2009, the MASB issued Statement of Principles i-1
(SOP i-1), Financial Reporting from an Islamic Perspective to affirm that
MASB approved accounting standards shall apply to Shariah compliant
financial transactions and events, unless there is a Shariah prohibition. Since
the MASB would no longer be issuing Islamic accounting standards, it
accordingly withdrew FRS i-1.

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2.2 Technical Standards MASB Islam
MASB not issue a separate Islamic accounting standards. MASB
approved accounting standards applicable to Islamic finance transactions and
events, unless there is a ban on Sharia. Additional guidance on accounting for
Islamic financial transactions and the event will take the form of another
statement, usually Releases Technical, supplements MASB approved
accounting standards. MASB Discussion Papers can also be issued for public
comment to seek confirmation from the Council understanding of certain
things, and to ask for views on alternative solutions and tentative conclusions.
The following is a technical statement of Islam today in publishing :
I-1 Statement of Principles (SOP i-1), Financial Reporting of Islamic
Perspective
SOP i-1 serves to inform that the MASB approved accounting
standards applicable to Islamic financial transactions, unless there is a ban on
Sharia.
Appendix SOP i-1, including review by the Shariah Advisory Council
(SAC) of Bank Negara Malaysia, which concluded, among other things, that
"generally accepted accounting principles or methods, as discussed in this
MASB proposal [ie SOP i-1], can be applied in financial reporting from the
perspective of Islam as their application does not conflict with the general
principles of Sharia or methodology ".
i-1 Technical Release (TR i-1), Accounting for Zakat on Business.
When an entity to pay zakat on business, TR i-1 requires the
entity to be recognized as an expense. This is to distinguish between
the zakat paid by the entity in its own legal capacity, and zakat is paid
on behalf of shareholders.
i-2 Technical Release (TR i-2), Ijarah.
Ijarah lessee confers the right to use the asset, while the
ownership of the underlying asset remains with the lessor. Although
'the whole asset approach when the MASB approved accounting

18
 standards are not appropriate rental convey the' splitting 'rights to the
assets, which confirms that the MASB MASB approved accounting
standards applicable to Ijara until and unless an alternative model to
hire accounting developed.
i-3 Technical Release (TR i-3), Presentation of Financial Statements
of Islamic Financial Institutions.
FRS i-1 retractable to eliminate the duplication of the
requirements already contained in other MASB approved accounting
standards. The remaining guidance in FRS i-1 is not found in other
standards were transferred to TR i-3. Guidance mainly concern the
presentation of information relating to the contract used by Islamic
financial institutions.
technical Releases i-4 (TR i-4), Shariah Compliant Sale Contracts.
TR i-4 was issued to clarify the recognition and derecognition
requirements for items acquired or transferred through a contract of
sale in accordance sharia. Among other things, TR i-4 requires an
entity to consider whether the sale is part of a series of related
transactions in determining whether the subject of the sales will be
recognized or derecognized.
Discussion Paper i-1 (DP i-1) Takaful.
DP i-1 to discuss issues such as whether takaful takaful
accounting falls within the scope of MFRS 4, the recognition and
measurement qard, consolidation, presentation of financial statements
of entities takaful, Islamic reinsurance, participating contracts, revenue
recognition and the need for additional disclosures.

Discussion Paper i-2 (DP i-2) Sukuk.

DP i-2 discuss accounting issues sukuk such as the
consolidation of any entity created through the issuance of sukuk,
derecognition of the transferred assets through the issuance of sukuk,

19
 the classification and measurement of sukuk by issuers and investors,
fair value measurement, interference, derivatives, guarantees and
disclosure related parties.

i-3 Discussion Paper (DP i-3) Profit sharing Sharia Compliant

Contract.
Sharia profit-sharing contract, or syirkah, usually used as the
underlying contract in many Islamic financial products, including bank
deposits, partnership agreements and setting joint assets.
DP i-3 Shariah Compliant sharing contract outlining accounting
problems cited most often associated with the Shariah contract
according to the results such as classification and measurement,
smoothing techniques, and consolidation, joint ventures and
investments in associates.
Feedback Statement Discussion Papers DP MASB i-1 Takaful,
Sukuk DP i-2 and DP-3 i Sharia Compliant Profit-sharing Contracts.
Responses This statement is a summary of the responses and
comments received on the Discussion Paper i-1 Takaful, Sukuk
Discussion Paperi-2 and I-3 Discussion Paper Contract Sharia
Compliant Profit-sharing. It does not provide any Council decision.

Research papers, Endowments

This research paper on accounting for endowments issued by the
Malaysian Accounting Standards Board as part of his Islamic studies.
If the form of an endowment established company, the financial
statements are likely to be processed or filed under the laws administered by
the Securities Commission, the Central Bank or the Registrar of Companies.
In accordance with the Financial Reporting Act 1997, the financial statements
must meet the MASB approved accounting standards. Therefore, MASB

20
directed staff to look into the potential financial reporting issues relating to the
endowment of the company.

2.3 MASB Islamic Technical Unit and Standing Committee on Islamic

Financial Reporting
The Islamic Technical Unit (ITU) is part of the MASB secretariat. The
ITU supports the MASB by undertaking research and accounting issues which
relate to Islamic finance, as well as co-ordinating meetings and work
programmes of the Standing Committee on Islamic Financial Reporting.
The Standing Committee, which replaces Working Group 36 (WG36),
is responsible for advising the MASB on the development and maintenance of
a robust financial reporting framework for entities engaged in Islamic finance.
The dissolution of WG36 and formation of the Standing Committee signifies
that Islamic financial reporting has become more important which requires
more thorough consideration. As such, the Standing Committee was
established with an expanded scope as compared to its predecessor. The
Standing Committee reports directly any IFRS issues on Islamic financial
transaction to the MASB.

2.4 AOSSG Islamic Finance Working Group

The Asian-Oceanian Standard Setters Group (AOSSG) is a grouping of
accounting standard-setters in the Asia-Oceania region. Within the AOSSG
are several working groups to provide input into topics that are of importance
to the region. MASB is the Leader of the AOSSG Islamic Finance Working
Group, whose other members comprise standard-setters from Australia, China,
Dubai, Korea, Pakistan and Saudi Arabia. The objective of the working group
is to facilitate AOSSG members by providing input and feedback to the IASB
on the adequacy and appropriateness of proposed and existing International
Financial Reporting Standards (IFRSs) to Islamic financial transactions and
events.

21
 The Working Group's most recent publication is AOSSG Survey:
Accounting for Islamic Financial Transactions and Entities. This report
captures the findings from a survey of 24 national standard-setters regarding
their views on accounting for Islamic financial transactions.
Other work produced by the Working Group include a Research Paper
entitled Financial Reporting Issues relating to Islamic Finance which presents
issues in accounting for Islamic financial transactions within an IFRS
framework. The Working Group has also commented on Exposure Drafts
issued by the IASB.

2.5 A Word about Islamic Finance

2.5.1 A Word about Islamic Finance: Part I
November 2012
In this first of a two-part article, MASB staff explain what is Islamic finance,
and share the behind-the-scenes thinking that led the MASB to subject Islamic
financial institutions (IFIs) to Malaysian Financial Reporting Standards (MFRS) - a
verbatim adoption of International Financial Reporting Standards (IFRS).

In the beginning
In the mid-20th century, nationalism was palpable throughout lands
under Western colonial rule. But unique to Muslim-majority countries, the
quest for independence was often couched in religious terms. Hence, rejection
of the colonialists political, social and economic systems was accompanied
with a desire for perceived Islamic substitutes. It was under these
circumstances that the idea of establishing economic practices that would
comply with Islamic law, or Shariah, was born.
One early experiment with Shariah-compliant economic practices was
the Mit Ghamr Savings Bank. Established in 1963 in the small town of Mit
Ghamr in Egypt, the bank primarily accepted savings and deposits, which

22
were invested in local businesses with profits channelled back to depositors.
Interestingly, during its life the endeavour was merely called interest-free
banking as the government of the day was wary of Islamic fundamentalism
and overt mention of Islamic tenets was carefully avoided.
In the ensuing decades, however, a newly affluent populace, enriched
by oil-wealth and economic growth, became bolder in demanding for financial
alternatives that would satisfy their heightened religious sentiments.
Consequently, financial institutions and their regulatory bodies began to
develop a multitude of products that would comply with Shariah.
From simple savings and loans, Islamic finance - as the industry came
to be known developed alternatives for many other modern financial
products. To address the need for security and protection, an alternative to
insurance called takaful was developed and offered by the General United
Insurance Company of Sudan in 1968. The year 1975 saw the first commercial
Islamic bank, Dubai Islamic Bank, as well as the supranational Islamic
Development Bank. In 1990, the Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) was established and registered in
Bahrain the following year. Also in 1990, Shell Malaysia issued the first
corporate sukuk, the Shariah-compliant answer to bonds.
Today there is an Islamic alternative for most conventional financial
instruments, whether simple or sophisticated. Where there is not, it is usually
due to a Shariah prohibition. However, proponents believe that far from being
handicapped by Shariah, its rules serve to put Islamic finance in good stead
and have largely shielded Islamic finance from the worst economic crisis since
the Great Depression.

Prospering and multiplying

Islamic finance grew steadily through to the new millennium.
Undoubtedly, Islamic financial institutions are dwarfed by conventional
banks; Shariah-compliant banking assets total about USD 1 trillion1,

23
compared to USD 96 trillion2 for the 1000 largest banks in the world.
However, they have been experiencing much higher growth rates. While many
banks are still suffering the adverse effects of the 2007 subprime mortgage
crisis and the 2008 global financial crisis, Islamic banks are comparatively
insulated (though, admittedly, not immune) from the aftershocks. Some
attribute this to Shariah rules which prevented involvement with the
repackaged toxic assets responsible for the crises. Regardless, the Islamic
finance industry continues to prosper, with the top 500 global Islamic financial
institutions growing at 21% per year3.
In recent years, there have been calls for Islamic finance to move into
new areas - both that have already been explored by conventional
counterparts, such as hedging and liquidity management, as well as uncharted
territory which would require not just replicating existing conventional
products but innovating new modes of finance that are purely based on
Shariah. Many of the latter proposals seem to involve moving away from debt
financing to equity financing, and away from deposit-taking to investment
management.
Government economic policies also seem to encourage Islamic
finance, as it allows access to untapped capital and creates new economic
opportunities. In Malaysia, the Securities Commission (SC) and the central
bank, Bank Negara Malaysia (BNM) have included Islamic finance sector as
one of their targeted growth areas. BNM plans for Islamic finance to account
for 40% of total financing by 20204 from the current 22%; and the SCs
Capital Market Masterplan 2 (CMP2) noted that in addition to growing
primary capital market products, the SC will also identify potential
opportunities in middle and back-office functions related to the Islamic capital
market.

Not being a moneylender, and charging no interest

24
 Though many are aware of the existence of Islamic finance, few
outside the industry are able to describe with certainty how it works and to
what extent it is similar or different to conventional finance.
Firstly, Islamic financing is characterised by the use of trade contracts
instead of loans. Charging interest on a loan principal is anathema, as lending
is an act of benevolence in Islam. It is, however, perfectly acceptable to make
gains on trading. In the Mit Ghamr example, the bank invested in local
businesses, it did not give them loans. Returns to savers and depositors were
accordingly share of profits, not interest. Other than direct investment, sales
(bai) and leases (ijarah) are also commonly used to achieve financing. An
Islamic bank does not give out housing loans. The bank either buys the house
then sells to the customer at a profit (a practice known as murabahah), or the
bank leases the house to the customer over the period of financing, with either
gradual sales over the lease or a sale at the end of the lease.
As for customer deposits, some are amounts entrusted for safe-
keeping, wadiah, and the bank may give a gift, hibah, to the customer for
letting it use the money. Others may be based on an agency principle,
wakalah, where the bank appropriates an agency fee from the profit.
Mudarabah splits profits between the bank and the customer according a pre-
agreed ratio, but classically any loss is borne by the customer. Strictly going
by this rule, a mudarabah deposit may not be a deposit at all; some consider
mudarabah necessarily in the realm of investment management and not
deposit-taking.
Secondly, the subject of trade must usually be a tangible item or a
permitted intangible. Permitted, however, means different things to different
Shariah scholars. Land and buildings are a universal favourite, possibly
overexposing Islamic finance to the real estate sector. Usufruct, or the right-
of-use, in a lease is also popular. Other intangibles such as patents, trademarks
and copyrights can fall into a grey area depending on what underlies the
intangible. Trading in debt, or bai al dayn, though routine in the conventional

25
sphere (e.g. in factoring, collateralised debt obligations), is a point of
contention amongst Shariah scholars; exceptions do exist and in Malaysia a
sale of debt may be allowed, for example, in the sale of home loans to the
national mortgage corporation. And, obviously, trade related to a prohibited
item (e.g. alcohol, tobacco, gaming) would not be permitted.
This leads to the third point of difference: the level of religious
supervision. While most major religions have something to say about money,
none of their adherents have developed faith-based finance to the extent that
Muslims have. This is largely attributable to the Muslim mind-set which must
consider the religious implication of every aspect of their lives, even those that
seem profane to others, such as banking. Hence, the average Islamic bank
would have a panel of Shariah experts to vet through the structure of its
products and a Shariah board to endorse them and attest in its annual report to
what extent the bank has complied with Shariah. In well-regulated markets,
bank regulators or supervisors would also have their own Shariah councils.
Although Islamic and conventional finance greatly differ in philosophy
and in legal form, the former is often structured to provide the same economic
effect as the latter. Hence, an Islamic bank customer is likely to incur roughly
the same cash flows as someone with an otherwise similar conventional loan.
This is especially true in jurisdictions where there is an incentive or
compulsion to maintain parity with conventional banking.

Speaking the truth

Because Islamic finance takes on contractual forms that are different
from conventional finance, there are those who believe different accounting
standards would be required; for only then can the legal reality be conveyed to
the reader of the financial statement. AAOIFI is the foremost advocate of
separate Islamic.
Accounting standards. Its stated approach is to accept generally
accepted accounting principles except where it believes there is a conflict with

26
Shariah. For the most part, this means that AAOIFI readily embraces
innocuous concepts such as timeliness, reliability and understandability. But,
historically, AAOIFI has been less welcoming to two key concepts in IFRS:
substance over form and time value of money.
Accordingly, a financial statement prepared in accordance with
AAOIFI standards can yield vastly different results from an IFRS-compliant
one. Take, for example, the sale of a house by a bank to a customer. Let us say
in 2001 a bank buys a house at RM500,000 and sells it to the customer at
RM696,650. The customer will pay in monthly instalments over a period of 10
years. If the overall economic objective was ignored and only the legal
contract considered, it could be said that this is a sale of goods where the gross
profit is RM196,650. However, it would be most unusual for a bank to
immediately report a RM196,650 profit.
AAOIFI appears to agree that recognition of profit is related to the
repayment period, and under its Financial Accounting Standard (FAS) No. 2,
Murabaha and Murabaha to the Purchase Orderer, the profit of RM196,650
would either be recognised proportionately over the repayment period or, in a
departure from the accruals concept, as and when instalments are received.
Crucially, AAOIFI does not seem to acknowledge that the profit represents a
financing element that is related to a principal disbursement. AAOIFIs
requirement for proportionate allocation is often taken by stakeholders to
mean a simple arithmetic division of total profit over the number of
instalments during the repayment period. This is because FAS 2 was prepared
in accordance with AAOIFIs original conceptual framework, which
propounded that money does not have a time-value. Hence, AAOIFI does
not require the pattern of profit recognition to be related to the amount of
principal outstanding.
The concept of time value of money is, conversely, central to IFRS
requirements for recognition of a financing element. Under IAS 18, Revenue,
when there is a difference between the fair value (i.e. RM500,000) and the

27
nominal amount of consideration (i.e. RM696,650) the difference (i.e.
RM196,650) is recognised as interest revenue (or financing revenue, for the
squeamish) using the effective interest method under IAS 39, Financial
Instruments: Recognition & Measurement. The effective interest method
amortises the cost of the financial asset (i.e. RM500,000) and allocates the
interest income (i.e. RM196,650) over the relevant period (i.e. 10 years),
based on the effective interest rate (which, using a calculator, comes to about
7%).

The table below provides an example of how different the pattern of income
recognition can be under AAOIFI and IFRS. To further illustrate how even
within AAOFI standards there may be differing outcomes, the table shows
both AAOIFI recognition based on proportionate allocation and recognition
based on actual receipts, given the scenario that the customer misses an
instalment in 2003 but pays-up in 2004.

Recognition and measurement of income for Murabahah home financing

In 2001, a bank buys a house at RM500,000 and sells it to the customer at
RM696,650. The customer pays in monthly instalments over a period of 10
years. In 2003, the customer misses an instalment but pays the amount in
2004. Below are the possible ways that the bank could recognise and
measure income over the 10 years.

Under AAOIFI standards Under IFRS

Relevant FAS 2, paragraph FAS 2, paragraph IAS 18,
paragraph(s) 2/4/2 (a) 2/4/2 (b) paragraphs 11,
29, 30
IAS 39,
paragraphs 9,
AG5-AG8

28
Requirement Proportionate Profits recognised Difference
allocation of as and when between fair value
profits over instalments are and nominal
period of credit received amount of
consideration
recognised as
interest revenue
in accordance with
IAS 39
RM RM RM
2001 19,665 19,665 33,866
2002 19,665 19,665 31,278
2003 19,665 18,026 28,503
2004 19,665 21,304 25,527
2005 19,665 19,665 22,337
2006 19,665 19,665 18,915
2007 19,665 19,665 15,247
2008 19,665 19,665 11,313
2009 19,665 19,665 7,094
2010 19,665 19,665 2,571
Total profit / 196,650 196,650 196,650
interest
income

So, which is the true and fair representation of such an income stream?
Like the story of the blind men touching different parts of an elephant, how
the elephant truly looks like depends on whom you ask. AAOIFI advocates
would argue that its measurement requirement is true to the trading nature of
murabahah. The pro-IFRS camp would counter-argue that measurement based

29
on the effective interest rate reflects the true substance of the sale, which is
financing.
Faced with such a conundrum, MASB sought the opinions of the
Shariah advisory councils of both the central bank, Bank Negara Malaysia
(BNM) and the Securities Commission of Malaysia (SCM). In a meeting in
October 2007, BNMs Shariah Advisory Council, with SCM representatives in
attendance, ruled that it was permissible to apply generally accepted
accounting principles to Islamic transactions, which included the principles of
accruals, substance over form, time value of money, and recognition based on
the probability of a transaction occurring5. In short, there is generally no
Shariah restriction to applying MASB approved accounting standards to
Islamic financial transactions. Consequently, in September 2009, MASB
issued a statement of principles (SOP) entitled SOP i-1, Financial Reporting
from an Islamic Perspective to confirm that MASB approved accounting
standards shall apply to Shariah compliant transactions, unless there is a
Shariah prohibition.
The MASB respects AAOIFIs point of view, but does not share it. In
MASBs opinion, information on the economic effect is as valuable as, if not
more than, information on the legal contractual form. Despite their contractual
differences, many Islamic finance products are meant to replicate the
economic effect of conventional products. Thus the MASB is more congenial
to IFRS recognition and measurement bases which emphasise the economic
substance of transactions. The MASB understands that the form of contract is
also important from an Islamic perspective, and hence also encourages
appropriate disclosures (which may include disclosures recommended by
AAOIFI) to highlight adherence or departure from Shariah and to differentiate
between Shariah-compliant and conventional contracts that are recognised and
measured in a similar manner.
Additionally, the MASB found that the Islamic accounting standards
available, namely those issued by AAOIFI, were designed for specific uses of

30
limited types of contracts. They were not broad enough to deal with Malaysian
products which used an amalgam of contracts to achieve a single economic
objective, and which sometimes used controversial contracts. For example, in
the early 2000s Malaysian Islamic banks often used bai inah, a form of sale-
and-buyback, to structure various products such as personal financing and
credit cards; despite its common use in Malaysia, AAOIFI accounting
standards ignore bai inah because its Shariah board deems it an impermissible
transaction.
It also became evident that having separate Islamic standards could
create undesirable opportunities for arbitrage and abuse. AAOIFI standards
allow ample leeway for pushing items off balance sheet. For example, a lessee
that would otherwise have to recognise lease obligations because it met the
criteria for afinance lease under IFRS could conceivably understate its
liabilities by availing itself to AAOIFI FAS No.8, Ijarah and Ijarah Muntahia
Bittamleek, which requires all ijarah to be treated as operating leases and not
recognise a lease liability.
Thus, it is for these reasons that when the IFRS-compliant Malaysian
Financial Reporting Standards (MFRS) came into effect on 1 January 2012, no
exemption was made for Islamic financial institutions.

2.5.2 A Word about Islamic Finance: Part 2

December 2012
In this second of a two-part article on Islamic finance, MASB staff
look at current issues with applying International Financial Reporting
Standards (IFRS) to Islamic transactions, and suggest what the International
Accounting Standards Board (IASB) can do to do to promote IFRS usage by
entities engaged in Islamic finance.

Convergence, and consequences thereof

31
 Since its inception in 1997, the MASB has had a project on Islamic
financial reporting. Initially, the plan was to develop an exclusive set of
Islamic accounting standards in the style of the Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI). However, the
MASB soon abandoned this approach as it disagreed with some of the
concepts and principles underlying AAOIFI standards, as well as to avoid the
potential for arbitrage and abuse that could arise from having separate
standards.
Upon deciding that the IFRS-compliant Malaysian Financial Reporting
Standards (MFRS) would apply to Islamic financial institutions (IFIs) in
Malaysia, the MASB had to further ascertain whether there would be any
problems with interpretation or implementation. Despite years of ignoring how
IFRS would impact Islamic finance transactions, MASB quickly established
itself as a thought-leader in this area. After combing through the entire corpus
of IFRS, MASB identified several areas that appeared to be an ill-fit. Happily,
many of these issues were quickly resolved with the co-operation of industry
players, the accounting fraternity and relevant regulators.
In this article, MASB staff are pleased to share with readers some of
the current topics in applying IFRS to Islamic transactions. Readers are
advised that as discussions are still on-going, some of the ideas presented may
change as time goes by.

Leases: Using things that dont belong to you.

In almost every class or course on Islamic accounting, ijarah, or
Islamic leasing, is touted as an example of why IFRS cannot be applied to
Islamic financial transactions. Under the current IAS 17, Leases, a lease must
be classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership of an asset. A lease that does not meet this
definition is classified as an operating lease.

32
 Sticklers for semantics argue that in ijarah a lessee only has usufruct,
or right-of-use, over the underlying asset. The lessee does not obtain
ownership of the underlying asset and does not assume substantially all the
risks and rewards incidental to ownership; therefore ijarah can never be
accounted for as a finance lease. Partly based on such reasoning, AAOIFI
Financial Accounting Standard (FAS) No. 8, Ijarah and Ijarah Muntahia
Bittamleek, requires all ijarah to be treated as operating leases. But by that
argument, no lease whether Islamic or otherwise would ever be accounted for
as a finance lease because it is the very essence of leasing that ownership of
the underlying asset remains with the lessor.
This leads to the second argument raised by AAOIFI supporters: if
ownership remains with the lessor, then the lessor must recognise a physical
asset thus furthering the case for operating lease treatment to apply to ijarah
lessors. However, this tendency to conflate ownership of an underlying asset
with accounting recognition of a physical asset ignores an important
distinction: there is a big difference between ownership of an asset to which
one has unrestricted access, and ownership of an asset where one has
transferred the right-of-use to another party.
Semantics aside, a fixation with operating leases is potentially
dangerous. Operating lease treatment can hide lease liabilities off the balance
sheet. Under finance lease treatment, a lessee is required to recognise a lease
asset and (more importantly) lease liabilities from inception. A lessee under an
operating lease is not required to recognise lease liabilities.
So why even allow operating lease classification in the first place?
Why indeed. Conceptually, all leases transfer to a lessee a right-of-use asset
and a lease payment obligation. But because it is sometimes difficult to
measure how much of an asset has been transferred to the lessee, most
standard-setters currently allow the simpler operating lease treatment for
insubstantial transfers of risks and rewards. However, due to a commitment to
conceptual soundness and concerns of potential.

33
 abuse, the IASB is now re-looking at how leases are accounted for. As
of July 2012, IASB documents released to the public indicate that the
upcoming replacement for IAS 17 may require lessees to recognise lease
liabilities for all but the most insignificant use of a lease asset. For lessees, the
proposals could be the death knell for operating lease accounting.
What does this mean for ijarah? That depends on what standards the
preparer adopts. For those applying IFRS, we expect wider reporting of lease
liabilities by lessees with a changed presentation of their lease assets, for
example, items currently labelled machinery may be described in future as
right-of-use of a machine. Lessor accounting will see a dramatic overhaul;
IASB staff are currently considering a receivable and residual approach
where the lessor would recognise the amount of lease payment receivable as
well as its residual interest in the leased asset.
MASB staff welcome IASBs new approach, and find it more
conceptually compatible with Shariah than the existing IAS 17. Shariah
acknowledges that ijarah is akin to bai (sale) of manfaat (benefit) of an asset
to the mustajir (lessee) while the muajjir (lessor) retains ownership of the
milik asal (underlying asset). Shariah further recognises that manfaat is mal
(an asset) to the lessee. Moreover, there are well-known Quranic
commandments to record debts owed. Hence, IASBs proposal to require
lessees to recognise a right-of-use asset and a lease liability ought to be
commendable under Shariah. And we cannot see why a lessor should not
measure an asset devoid of its right-of-use differently from an asset over
which it has full rights.
However, for preparers reporting under AAOIFI standards, it is
uncertain to what extent AAOIFI has accepted or even considered the new
conceptual approach to leases. If AAOIFI maintains its status quo, the
comparability gap with IFRS would widen further with all ijarah reported as
operating leases under AAOIFI and very few reported as such under IFRS.

34
Investment accounts: No pain, no gain.
The previous article mentioned how Islamic banks can accept monies
from customers based on mudarabah and wakalah. Classically, a person
contributing to an enterprise under mudarabah would be expected to share
profits with the entrepreneur but bear all loses himself; in wakalah, the
investing principal is expected to pay a fee to the party acting as agent
regardless of how the investment performs. Clearly, these features create
products that are inherently riskier to the accountholder than conventional
deposits. To cater for a risk-adverse clientele, retail banks in Malaysia usually
incorporate mechanisms (e.g. setting aside reserves and obtaining third party
guarantees) to ensure that mudarabah and wakalah accountholders receive
consistent returns and capital protection. Currently, Malaysian banks and their
customers consider these accounts as deposits; and because.
Banks have taken on a constructive obligation to customers, they
normally present mudarabah and wakalah accounts in their balance sheet as
liabilities. However, this may soon change.
It is well-known that the central bank, Bank Negara Malaysia (BNM)
is encouraging Islamic banks to offer mudarabah and wakalah as investment
accounts instead of deposits. These investment accounts are expected to
transfer more risks and rewards to the customer, in line with classical Shariah
rules. Hence, questions abound as to how these investment accounts would be
treated for accounting purposes.
Under AAOIFI standards, the accounting treatment would depend on
whether the investment account is unrestricted or restricted. FAS No. 6,
Equity of Investment Account Holders and Their Equivalent, defines an
unrestricted investment account as an account in which the investment
account holder authorizes the Islamic bank to invest the account holders
funds in a manner which the Islamic bank deems appropriate without laying
down any restrictions as to where, how and or what purposes the funds should
be invested. For a restricted investment account, the account holder imposes

35
certain restrictions as to where, how and for what purpose his funds are to be
invested. An unrestricted investment account is classified as its own element
of the balance sheet, between liability and equity. A restricted investment
account is considered an off-balance sheet item.
Under IFRS, these AAOIFI definitions and treatment would not apply.
Firstly, IFRS only recognises three elements of the balance sheet asset,
liability, equity it does not have an intermediary category between liability
and equity. Secondly, IFRS does not attach much significance to how broad or
narrow the investment mandate is. Instead, an investment account would be
reported on balance sheet if it gives rise to a liability under IAS 37,
Provisions, Contingent Liabilities and Contingent Assets, or a financial
liability under IAS 32, Financial Instruments: Presentation.
If the investment account does not give rise to a liability for the bank,
then the investment account may be reported in a separate financial statement.
But the reporting bank must then consider whether it has control over the
investment account, and must consolidate the investment account if it does.
IAS 27, Consolidated and Separate Financial Statements, defines control as
the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. From 1 January 2013, IFRS 10
Consolidated Financial Statements will replace IAS 27s consolidation
requirements. IFRS 10 provides much more detailed guidance on how to apply
the principle of control.
For example, let us say an investment mandate only allows the funds to
be invested in home financing carried out by the bank. Under AAOIFI, this
limited mandate may meet the definition of a restricted.
Investment account, and conceivably the investment account could be
excluded from the banks balance sheet. Under IFRS, this restricted
investment account, even if reported in a separate financial statement, may be
consolidated if it is determined that the bank controls it. In this case, there are
several indicators that indicate control exists.

36
 Purpose and design of the investment account
The investment account would secure a source of funding for a
principal activity of the bank, i.e. providing home financing.

Relevant activities of the investment and how decisions about those

activities are made
The investment mandate presumably gives the bank decision-making
power over relevant activities related to the investment, e.g. the selection,
acquisition and disposal of home financing.

Rights of the bank give it the current ability to direct the relevant
activities of the investment account
The bank may have the practical ability to unilaterally direct the
selection, acquisition and disposal of home financing.

Banks exposure and rights to variable returns

The bank may have rights to variable returns that vary as a result of the
performance of the investment account, as in the case of profits shared under
mudarabah and any performance incentive fees under wakalah.

Banks ability to use its power over the investment account to affect the
amount of the banks returns
Of the home financings it processes, the bank may have the ability to
decide which ones would be financed from its own resources and which ones
from the fund such that it can affect the income it receives.
Hence, under IFRS, the labels unrestricted and restricted, and the
transfer of risk and rewards, are of lesser importance in determining
consolidation based on control.

37
 As a corollary, MASB staff note that the switch from deposit to
investment account would affect more than just the financial statement. There
are other implications in terms of governance, operations and prudential
measures. For example, how would moving these accounts off balance sheet
affect the banks capital requirements, and would there be mechanisms to
ensure the quality of investments made with customer monies. There is also
the matter of consumer perception and preference how would they react to a
product that transfers more risk to them.

Qard: A loan. Or is it?

38
 One of the hottest current issues in Islamic financial reporting does not
relate to banking, but to takaful. The issue is how to account for qard, an
interest-free loan that a takaful operator extends to its participants funds.
In takaful, individuals do not buy policies from an insurer. Instead,
they participate in a fund by pooling their monies and agreeing to mutually
indemnify each other should a specified event befall any one of them. The
fund is managed by a takaful operator, an entity that is usually licensed under
similar circumstances as an insurer. In many jurisdictions, a takaful operator is
required to extend qard if there is a deficit in the participants fund. In
Malaysia, takaful entities have usually presented.
Qard as a loan measured at cost. This treatment was allowed by Bank
Negara Malaysia under the previous reporting regime, and hence was readily
accepted by stakeholders.
The changeover to MFRS/IFRS, however, has put takaful entities in a
quandary. There is no such thing as a loan measured at cost under IFRS. At a
glance, qard appears to be a financial instrument subject to IAS 39, Financial
Instruments: Recognition and Measurement. But under IAS 39, a financial
instrument must be measured at either amortised cost or at fair value; there is
no allowance for measurement at cost. Moreover, qard does not fit any of the
definitions of the four categories of financial instruments.
Qard from a takaful operator to a participants fund often carry unique
terms that make it different from the financial instruments under IAS 39. For
example, in many jurisdictions, repayment of qard is subordinated to other
debts of the participants funds. Hence, it could be said that qard represents a
residual interest in the participants fund. This feature may render qard more
similar to equity rather than a financial asset to the takaful operator. Thus,
there is an alternative view that qard should be classified similar to investment
in a subsidiary under IAS 27, Consolidated and Separate Financial
Statements.

39
 Joining the furore are those who think qard should simply be
expensed-off. There is a classical view that while repayment of qard is
welcomed, it is not expected; this is especially true of qard hasan, a
benevolent interest-free loan. Hence, some consider qard to be part and parcel
of the expenses incurred in running a takaful operation.
As of July 2012, relevant stakeholders are discussing the treatment of
qard. Many discussants indicate a preference for classification as investment
in subsidiary, which happily allows qard to continue to be measured at cost.
Regardless, a speedy resolution is required if takaful entities are to assert
compliance with MFRS/IFRS in their annual financial statements. And the
decision reached must be defensible to global stakeholders and observers.

What the IASB can (and must!) do

Readers may have noticed that the discussions about applying IFRS to
Islamic transactions are taking place within Malaysian shores, with little IASB
involvement. This should be a cause for concern.
While we are confident that the deliberating parties are of the highest
calibre, the fact remains that any resolution made by Malaysian stakeholders
will be exactly that a Malaysian resolution. No matter how sound our
reasoning, the conclusions to these issues run the danger of being seen as local
interpretations, which is something disapproved by IASB and the global
investing community. Thatbeing the case, MASB staff believe it is high time
that the IASB itself tackle Islamic financial reporting issues.
In 2011, the IASB issued an agenda consultation document asking the
public what they think the IASB should be working on for the next three
years. Among the topics suggested in that document was Islamic finance.
Unfortunately, very few respondents thought that Islamic finance should be on
IASBs agenda.
MASB staff, however, are not disheartened and strongly advocate the
establishment of an Islamic finance advisory group to provide IASB with

40
views and input from industry experts. We envision that the advisory group
would be responsible for providing technical advice to relevant IASB projects,
as well as assist IASB in outreach and advocacy to promote the use of IFRS
among entities engaged in Islamic finance.
At the time of writing, the IASB has publicly stated that it supported
establishing a consultative group to assist the IASB with matters related to
Shariah law though there is currently little concrete discussion on the matter.
We, nevertheless, remain optimistic as we are certain that the IASB simply
cannot afford to ignore a USD 1 trillion global industry.

41
 CHAPTER III
CLOSING

3.1 Conclusion
1. The Malaysian Accounting Standards Board (MASB)
Was established under the Financial Reporting Act 1997 (the Act) as
an independent authority to develop and accounting issues and financial
reporting standards in Malaysia.
MASB, together with the Financial Reporting Foundation (FRF),
establish a framework for financial reporting in Malaysia. The framework
consists of an independent standard-setting structure with representatives from
all parties involved in the standard-setting process, including makers, users,
regulators and the accounting profession.

2. Developments in Islamic Accounting Standards MASB

MASB has had Islamic financial reporting project since its inception in
1997. The initial sentiment is that a separate, stand-alone set the Islamic
standards necessary to satisfy Islam reported transactions and events; and in
2001, the standard MASB i-1, Presentation of Financial Statements of Islamic
Financial Institutions, published (then FRS i-1 renumbering.
However, subsequent research staff appear to indicate that many of the
concepts of accounting principles of conventional and generally accepted
accounting can be applied to Islamic finance transactions and events despite
the additional disclosures to explain the use of Islamic contracts. Indeed, even
MASB i-1 (FRS i-1) is largely a repetition of the requirement has been found
in FRS 101, Presentation of Financial Statements, and FRS 108, Accounting
Policies, Changes in Accounting Estimates and Errors.

3.2 Suggestion

42
1. Job Training Hopefully this report can be useful to readers.
2. Any criticism and constructive suggestions very authors expect so we can
rectify any shortcomings in the writing of this report Job Training.

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