Accounting For Sukuk Under IFRS & AAOIFI Accounting-Standards PDF

8/1/2016 Accounting for sukuk under IFRS and AAOIFI accounting standards
Accounting for sukuk under IFRS and AAOIFI
accounting standards
26 May 2011
Summary
This page comprises a chapter which I contributed to the book "Global Growth,
Opportunities and Challenges in the Sukuk Market" AAOIFI and IFRS
(http://www.euromoneybooks.com/product.asp? accounting standards have
PositionID=8875&ProductID=14299&=PWCAmin) edited by Sohail Jaffer and different objectives.
published by Euromoney Books. It is reproduced here by agreement with Euromoney.
A worked example shows
how a sukuk transaction
It reviews how sukuk are accounted for under International Financial Reporting can be accounted for quite
Standards (IFRS) and under the accounting standards promulgated by the Accounting differently under AAOIFI
and Auditing Organisation for Islamic Financial Institutions (AAOIFI). and IFRS.
Neither answer is "more

The purpose of nancial accounting right" than the other.
Selection between the
Both standards setting bodies have set out the purposes of financial accounting as they standards depends upon
see them. one's objectives.
Almost all of the world

AAOIFI accounts under IFRS, while
AAOIFI is only used in a
few countries. Accordingly
AAOIFI was established in 1991 and published "Statement of Financial Accounting No.
1: Objectives of Financial Accounting for Islamic Banks and Financial Institutions" in AAOIFI needs to
1993. The introduction to that statement says: reconsider its role in
accounting standard setting.
"Financial accounting in Islam should be focused on the fair reporting of the entity's
financial position and results of its operations, in a manner that would reveal what is halal (permissible) and haram
(forbidden).
Section 6/2 of the standard sets out the objectives of financial reports in six paragraphs which the first is:
"Information about the Islamic bank’s compliance with the Islamic Shari’a and its objectives and to establish such
compliance; and information establishing the separation of prohibited earnings and expenditures, if any, which occurred,
and of the manner in which these were disposed of."
IFRS
IFRS are published by the International Accounting Standards Board (IASB). In 2001 the IASB adopted its "Framework for the
Preparation and Presentation of Financial Statements." Paragraph 12 states:
"The objective of financial statements is to provide information about the financial position, performance and changes in
financial position of an entity that is useful to a wide range of users in making economic decisions.”
http://www.mohammedamin.com/Islamic_finance/Sukuk-accounting-under-IFRS-and-AAOIFI.html 1/17
In paragraph 33 and 34 the framework emphasises the need to faithfully represent the transactions that have taken place:
To be reliable, information must represent faithfully the transactions and other events it either purports to represent or
could reasonably be expected to represent. Thus, for example, a balance sheet should represent faithfully the
transactions and other events that result in assets, liabilities and equity of the entity at the reporting date which meet the
recognition criteria.
Most financial information is subject to some risk of being less than a faithful representation of that which it purports to
portray. This is not due to bias, but rather to inherent difficulties either in identifying the transactions and other events to
be measured or in devising and applying measurement and presentation techniques that can convey messages that
correspond with those transactions and events. In certain cases, the measurement of the financial effects of items could
be so uncertain that entities generally would not recognise them in the financial statements; for example, although most
entities generate goodwill internally over time, it is usually difficult to identify or measure that goodwill reliably. In other
cases, however, it may be relevant to recognise items and to disclose the risk of error surrounding their recognition and
measurement.
Paragraph 35 emphasises the importance of substance over form:
If information is to represent faithfully the transactions and other events that it purports to represent, it is necessary that
they are accounted for and presented in accordance with their substance and economic reality and not merely their legal
form. The substance of transactions or other events is not always consistent with that which is apparent from their legal
or contrived form. For example, an entity may dispose of an asset to another party in such a way that the
documentation purports to pass legal ownership to that party; nevertheless, agreements may exist that ensure that the
entity continues to enjoy the future economic benefits embodied in the asset. In such circumstances, the reporting of a
sale would not represent faithfully the transaction entered into (if indeed there was a transaction).
The above quotations illustrate that the two standard-setting organisations have different priorities. The implications will be seen when
the accounting for sukuk transactions is considered in detail. As accounting issues are much easier to understand when illustrative
numbers are available, this chapter considers two transaction scenarios.
Scenario one - bond issue
Before considering an illustrative sukuk transaction, it is helpful to consider the case of a hypothetical company, Trader plc which
makes a conventional public bond issue with the following terms and consequential cash flows:
Illustrative public bond issue transaction summary
Date Transactions Cash paid

1 January 2011 Trader plc issues corporate bonds to investors 100.00
Annual interest 5%
Bonds repayable in five years time for £110
Bonds secured on Trader plc's office building
The internal rate of return on the loan is approximately 6.477%
31 December 2011 Trader plc pays interest to bond investors 5.00
31 December 2014Trader plc pays interest to bond investors 5.00

Trader plc pays investors to repay the bond 110.00
Note that Trader plc is due to repay £110 when the bond matures even though only £100 was borrowed. Accordingly over the five
years Trader plc incurs a total cost of £35 (five annual payments of £5 plus the premium on redemption of £10) as the cost of
borrowing the £100. This aggregate cost needs to be spread over the five years in the most appropriate manner. IFRS requires one
to compute an annual cost of funds to apply to the amount owed. An internal rate of return calculation will show this to be
approximately 6.477%. Under accruals accounting, Trader plc is required to recognise an initial bond liability of £100 which is then
amortised upward toward the redemption amount as illustrated in the bond liability table below.
Bond liability table
Interest on
opening
balance at Bond
Bond liability approximately Cash liability
Year b/f 6.477% paid c/f
2011 100.00 6.75 5.00 101.75
2012 101.75 6.87 5.00 103.62
2013 103.62 6.99 5.00 105.61
2014 105.61 7.13 5.00 107.74
2015 107.74 7.26 5.00 110.00
In order to present a complete set of accounts for Trader plc, some assumptions are required regarding its other financial numbers.
The following have been assumed:
Operating income £250 per annum before bond interest expense.
Trader plc distributes all post-tax profits to its shareholders. This assumption simplifies the calculations
and makes it easier to follow the cash balances shown in the accounts.
Trader plc starts on 1 January 2011 with a building costing £100, other operating assets of £350 and £25
cash before the bond issue. These assets are financed by £475 of shareholders equity.
These assumptions give rise to the following income statement, cash flow statement and balance sheet for Trader plc over the five
year life of the bond.
Year ended Year ended Year ended Year ended Year ended
31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Income statement
Operating income 250.00 250.00 250.00 250.00 250.00
Interest expense -6.75 -6.87 -6.99 -7.13 -7.26
Net profit 243.25 243.13 243.01 242.87 242.74
Distribution to
shareholders
-243.25 -243.13 -243.01 -242.87 -242.74
Retained profit - - - - -
31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Cash flow statement
Interest expense -6.75 -6.87 -6.99 -7.13 -7.26
Add back non-cash interest

expense 1.75 1.87 1.99 2.13 2.26
Net cash generated by

operating activities 245.00 245.00 245.00 245.00 245.00
Financing transactions
Proceeds from issue of bonds 100.00
Dividends paid to owners of the

company -243.25 -243.13 -243.01 -242.87 -242.74
Cash used to redeem bonds -110.00
Net cash from financing

activities -143.25 -243.13 -243.01 -242.87 -352.74
Net increase in cash 101.75 1.87 1.99 2.13 -107.74
Cash at the beginning of the

year 25.00 126.75 128.62 130.61 132.74
Cash at the end of the year 126.75 128.62 130.61 132.74 25.00
31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Building
100.00 100.00 100.00 100.00 100.00
Other operating assets 350.00 350.00 350.00 350.00 350.00
Cash 126.75 128.62 130.61 132.74 25.00
Total assets 576.75 578.62 580.61 582.74 475.00
Financed by:
Shareholders equity 475.00 475.00 475.00 475.00 475.00
Bond liability 101.75 103.62 105.61 107.74 -
576.75 578.62 580.61 582.74 475.00
There is no purpose in preparing any accounts under AAOIFI accounting standards for this bond issue scenario. AAOIFI is not
concerned with companies that engage in conventional financial transactions.
Scenario two - sukuk issue
Instead of the bond issue above, assume now that Trader plc obtains £100 of finance by issuing sukuk. The sukuk transaction is
designed to replicate the economics of the conventional bond transaction from the perspective of Trader plc. Its details and the
associated cash flows are set out below. (SPV is a Special Purpose Vehicle, a company set up specifically for this sukuk transaction,
which is normally owned by a charity.)
Date Transactions Cash paid

1 January 2011 Trader plc sells office building to SPV 100.00
Trader plc agrees to repurchase building in five years time for £110
SPV leases office building to Trader plc for £5 pa
Sukuk investors subscribe for sukuk issued by SPV 100.00
SPV holds building on trust for sukuk investors
Trusteeship fee set at £0.02 pa
SPV has £0.01 of paid in capital prior to sukuk transaction
31 December 2011 Trader plc pays rent to SPV 5.00

SPV charge made to trust 0.02
SPV pays operating costs 0.01
SPV dividend distribution to charity 0.01
SPV cash distribution to investors 4.98




Trader plc pays SPV cost of repurchasing office building 110.00
From Trader plc's perspective the cash flows under the sukuk transaction are identical to the cash flows under the bond. To ensure
this, the minor costs of selling the building to the SPV have been ignored.
SPV has some real costs of its own, even though they are small, and here they have been assumed to be equivalent to one basis
point. The transaction also assumes that SPV is to make a profit of one basis point which it will distribute to the charity which is its
shareholder so the total cost to the investors from the use of a sukuk structure is two basis points as compared with the bond issue
scenario.
While this article is about accounting rather than Shariah, the statement of the AAOIFI Shariah board in February 2008 addresses in
section five the buyback of the building:
Fifth: It is permissible for a lessee in a Sukuk al-Ijarah to undertake to purchase the leased assets when the Sukuk are
extinguished for its nominal value, provided he {lessee} is not also a partner, Mudarib, or investment agent.
This permission of a fixed price buyback of the building where the sukuk structure involves an ijarah contract is the reason that most
sukuk now use ijarah; it enables the guarantee of a fixed predetermined return to the sukuk investors provided that Trader plc
remained solvent so that it can honour its obligations to pay rent and to repurchase the building.
The above diagram shows the sukuk structure with the initial and periodical cash flows. The unwind transactions are not shown.
This diagram was created specifically for this website article, and was not present in the published book chapter for space reasons.
IFRS accounting for the sukuk transaction
Under IFRS, one is required to consider the economic substance of the transactions.
From the perspective of Trader plc, under the sukuk transaction it receives £100, is required to pay five annual rental payments of £5
and to pay £110 at the end of the transaction when legal title to the building will be returned to Trader plc. The repurchase price of
£110 is fixed regardless of whether the building soars in value or whether its value reduces. Accordingly, Trader plc is fully exposed
to all changes in the economic value of the building. This means that under IFRS the sukuk transaction is regarded purely as a
financing transaction; Trader plc recognises a financial liability in respect of the sukuk while retaining the building on its balance sheet
even though Trader plc does not own it during the life of the sukuk transaction. The precise accounting terminology is that Trader plc
does not "de-recognise" the building.
Trader plc will therefore prepare the following accounts under IFRS:
Year Year Year Year

Year ended ended ended ended ended
Income statement 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Financing expense under

sukuk transaction -6.75 -6.87 -6.99 -7.13 -7.26
Net profit 243.25 243.13 243.01 242.87 242.74
Distribution to
shareholders -243.25 -243.13 -243.01 -242.87 -242.74
Year Year Year Year Year

ended ended ended ended ended
31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Cash flow statement
Financing expense under

sukuk transaction -6.75 -6.87 -6.99 -7.13 -7.26
Add back non-cash

financing expense 1.75 1.87 1.99 2.13 2.26

Proceeds from sukuk

financing transaction 100.00
Dividends paid to owners

of the company -243.25 -243.13 -243.01 -242.87 -242.74
Payment of sukuk financing obligation -110.00

activities -143.25 -243.13 -243.01 -242.87 -352.74
Cash at the beginning of

the year 25.00 126.75 128.62 130.61 132.74
Cash at the end of the

year 126.75 128.62 130.61 132.74 25.00

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Building 100.00 100.00 100.00 100.00 100.00
Other operating assets 350.00 350.00 350.00 350.00 350.00
Cash 126.75 128.62 130.61 132.74 25.00
Total assets 576.75 578.62 580.61 582.74 475.00
Financed by:
Shareholders equity 475.00 475.00 475.00 475.00 475.00
Liability under sukuk

financing transaction 101.75 103.62 105.61 107.74 -
576.75 578.62 580.61 582.74 475.00
Footnote disclosure for Trader plc balance sheet
On 1 January 2011 Trader plc entered into a sukuk financing transaction by selling the building to an SPV for £100 and
leasing it back for five years at an annual rent of £5 pa. Trader plc is obligated to repurchase the building for £110 on
31 December 2015. As Trader plc retains all of the risks and rewards in relation to the building, the transaction has
been accounted for as a financing transaction and the building has not been derecognised from Trader plc's balance
sheet. The effective cost of finance under the sukuk transaction is approximately 6.477%.
SPV is a company and is itself also obliged to prepare accounts. These will be as follows:
Year Year Year Year

Operating income
(trusteeship charge) 0.02 0.02 0.02 0.02 0.02
Operating expenses -0.01 -0.01 -0.01 -0.01 -0.01
Net profit 0.01 0.01 0.01 0.01 0.01
Distribution to
shareholders -0.01 -0.01 -0.01 -0.01 -0.01
Year Year Year Year

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Cash flow statement

Dividends paid to owners

of the company -0.01 -0.01 -0.01 -0.01 -0.01

activities -0.01 -0.01 -0.01 -0.01 -0.01
Net increase in cash - - - - -
Cash at the beginning of

the year 0.01 0.01 0.01 0.01 0.01
Cash at the end of the

year 0.01 0.01 0.01 0.01 0.01

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Cash 0.01 0.01 0.01 0.01 0.01
Shareholders funds 0.01 0.01 0.01 0.01 0.01
Footnote disclosure for SPV balance sheet
SPV acts a trustee in respect of sukuk financing transaction initiated by Trader plc. Under this transaction, SPV holds
the legal title to a building on trust, with the beneficial interest being held by the owners of the sukuk instruments. As
SPV is acting only as a trustee, the building and the cash flows arising from it are not shown on SPV's balance sheet.
Accordingly, SPV accounts only for its trusteeship fee and its own operating expenses and dividends paid to the charity
which is SPV's sole shareholder.
It will be seen that Trader plc’s financial statements have identical numbers to the bond issue scenario. That is to be expected as
Trader plc’s cash flows under the sukuk transaction are identical to its cash flows under the conventional bond transaction. As both
transactions have the same economic consequences for Trader plc, under IFRS they receive almost identical accounting treatment,
since the goal of IFRS is to reflect the substance of the transactions undertaken.
The text descriptions are slightly different to recognise the fact that although Trader plc's payments to sukuk holders in excess of the
amount they subscribed for the sukuk are regarded as a financial expense, they are not interest. Furthermore, Trader plc gives details
of the sukuk financing transaction in the notes to the financial statements so that investors are not misled by the fact that the building is
included on Trader plc's balance sheet even though it is not owned.
Although SPV owns the building, it is held in trust for the sukuk investors and is not beneficially owned by SPV. Accordingly SPV
does not include the building as an asset on its balance sheet. Similarly the sukuk are not a liability of SPV; they represent the
investors’ beneficial interest in the building which is held on trust for them by SPV.
AAOIFI accounting for the sukuk transaction
AAOIFI does not have a specific accounting standard for sukuk.
Unlike IFRS, "Statement of Financial Accounting No. 1: Objectives of Financial Accounting for Islamic Banks and Financial
Institutions" mentioned above does not have any overriding concept of substance. Nor does "Statement of Financial Accounting No.
2 (Amended): Concepts of Financial Accounting for Islamic Banks and Financial Institutions" also adopted in 1993.
However AAOIFI has recently redrafted these statements in July 2010 to take account of substance, to give it recognition in addition
to recognising the importance of the legal form of the contract. However, there is an overriding requirement to make sure that if
substance and form are in conflict Shariah shall prevail.
Given the importance of demonstrating to the users of the accounts that the transactions comply with Shariah, in the writer’s opinion
under AAOIFI the financial statements would be prepared as below. The key differences between the following AAOIFI accounts
and the IFRS accounts are as follows:
Trader plc reports the sale of the building for £100 at the beginning and its repurchase for £110 at the
end. (Under IFRS the building was not treated as being sold.)
No financial liability is ever shown for the sukuk transaction.

Trader plc records only a cost of £5 for each of the five years representing the rent being paid for use of
the building.
All of the £110 paid at the end is recorded as the acquisition price of the new building.

Rent -5.00 -5.00 -5.00 -5.00 -5.00
Net profit 245.00 245.00 245.00 245.00 245.00
Distribution to
shareholders -243.25 -243.13 -243.01 -242.87 -242.74
Retained profit 1.75 1.87 1.99 2.13 2.26

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Cash flow statement
Net cash generated

by operating
activities 245.00 245.00 245.00 245.00 245.00
Investing activities
Proceeds from sale

of building 100.00
Purchase of building -110.00
Net cash from (used

in) investing activities 100.00 - - - -110.00
Dividends paid to
owners of the
company -243.25 -243.13 -243.01 -242.87 -242.74
Net cash from

financing activities -243.25 -243.13 -243.01 -242.87 -242.74
Cash at the
beginning of the year 25.00 126.75 128.62 130.61 132.74
Cash at the end of

the year 126.75 128.62 130.61 132.74 25.00

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Building - - - - 110.00
Other operating
assets 350.00 350.00 350.00 350.00 350.00
Cash 126.75 128.62 130.61 132.74 25.00
Total assets 476.75 478.62 480.61 482.74 485.00
Financed by:
Shareholders equity
b/f 475.00 476.75 478.62 480.61 482.74
Retained profit of
current year 1.75 1.87 1.99 2.13 2.26
476.75 478.62 480.61 482.74 485.00
SPV's will also prepare its own accounts under AAOIFI
Operating income
(trusteeship charge) 0.02 0.02 0.02 0.02 0.02
Operating expenses -0.01 -0.01 -0.01 -0.01 -0.01
Net profit 0.01 0.01 0.01 0.01 0.01
Distribution to
shareholders -0.01 -0.01 -0.01 -0.01 -0.01

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Cash flow statement
Net cash generated

by operating
activities 0.01 0.01 0.01 0.01 0.01
Dividends paid to
owners of the
company -0.01 -0.01 -0.01 -0.01 -0.01
Net cash from

financing activities -0.01 -0.01 -0.01 -0.01 -0.01
Net increase in cash - - - - -
Cash at the
beginning of the year 0.01 0.01 0.01 0.01 0.01
Cash at the end of

the year 0.01 0.01 0.01 0.01 0.01
31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Cash 0.01 0.01 0.01 0.01 0.01
Shareholders funds 0.01 0.01 0.01 0.01 0.01
Accounts should also be prepared for the sukuk investment fund for which the SPV is a trustee

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Statement of operations
Rental income 5.00 5.00 5.00 5.00 5.00
Gain from sale of building 10.00
Net income before

the mudarib's share 5.00 5.00 5.00 5.00 15.00
Mudarib's share -0.02 -0.02 -0.02 -0.02 -0.02
Net income after the

mudarib's share 4.98 4.98 4.98 4.98 14.98
Distribution to sukuk
holders -4.98 -4.98 -4.98 -4.98 -14.98
Net income retained - - - - -

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015
Balance sheet
Building 100.00 100.00 100.00 100.00 -
Sukuk investors
stake in investment -
fund 100.00 100.00 100.00 100.00
Footnote
When the building was sold on 31/12/2015, the entire sale proceeds of £110 were distributed to the sukuk holders as
the investment fund was dissolved at that time.
In the writer’s view, as well as preparing its own accounts as SPV, accounts should be prepared for the investment fund represented
by the sukuk in accordance with Financial Accounting Standard 14 "Investment Funds" and that these are also shown above.
For comparability, Trader plc is shown as distributing only the same amount of profit each year as a dividend to its shareholders as it
distributes under IFRS accounting. (The amount to distribute is a management decision and Trader plc is not required to distribute all
of its post tax profit.) Accordingly, Trader plc's cash balances are the same as under the IFRS scenario. The key difference is that
over the five-year period Trader plc records £10 less in total expenses and at the end of the period it reports the purchase of the
building for £110 whereas under IFRS the building remains on Trader plc's balance sheet throughout at £100.
Which is right?
This is not a meaningful question. IFRS and AAOIFI accounting have different objectives and perspectives.
IFRS analyses the sukuk transaction entirely on the basis of its economic substance and sees it as a financing transaction.
Fundamentally, this derives from the requirement to repurchase the building at a fixed price irrespective of the market value.
As an alternative, if the sukuk transaction required Trader plc to repurchase the building at the open market value on the date of
repurchase (which totally changes the economics of the transaction) then Trader plc would record only £5 of rental expense each
year, and it would de-recognise the building when sold to the SPV since from that point Trader plc would have no economic
exposure to value changes in the building.
The main purpose of AAOIFI accounting is to satisfy the religious needs of the users of the accounts. Accordingly AAOIFI does not
allow substance to determine the presentation of the accounts but instead gives significant weight to the legal form of contracts and
Shariah requirements are overriding.
The future of AAOIFI accounting standards
When AAOIFI was established, global accounting was very fragmented. Although international accounting standards existed, most
countries required the use of local accounting standards and in the countries of the Gulf accounting standards were nascent or non-
existent. Accordingly AAOIFI played an important standard setting role in the Islamic finance industry at that time.
In 2010 the picture is very different. Outside a few countries in the Gulf and the USA, virtually the entire world accounts under IFRS.
The last significant holdout is USA but there is a convergence project between the US Financial Accounting Standards Board and
the IASB to converge IFRS and US GAAP (Generally Accepted Accounting Principles). Accordingly, Islamic financial institutions in
all parts of the world apart from some Gulf countries will be accounting under IFRS very shortly if they do not already do so.
In these circumstances, there is little point in AAOIFI continuing to promulgate accounting standards. Instead, it should focus on
Shariah standards where AAOIFI's role is critical. As far as accounting is concerned, AAOIFI should encourage the IASB to ensure
that the needs of Islamic users of financial statements are met by IFRS. This would include such matters as additional footnote
disclosures so that investors knew what proportion of a company's dividend payments represented impure income, what part of its
retained earnings were impure and which of the company's assets were liable to Zakah. Islamic investors would like to have such
information in respect of the financial statements of all publicly traded companies, with the exception of those companies carrying on
wholly prohibited activities such as alcohol distribution.
(http://www.euromoneybooks.com/product.asp?
PositionID=8875&ProductID=14299&=PWCAmin)
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8/1/2016 Accounting for sukuk under IFRS and AAOIFI accounting standards

Accounting for sukuk under IFRS and AAOIFI

Neither answer is "more

Almost all of the world

Paragraph 35 emphasises the importance of substance over form:

Scenario one - bond issue

Illustrative public bond issue transaction summary

Date Transactions Cash paid

31 December 2011 Trader plc pays interest to bond investors 5.00

31 December 2012 Trader plc pays interest to bond investors 5.00

31 December 2013 Trader plc pays interest to bond investors 5.00

31 December 2015 Trader plc pays interest to bond investors 5.00

Bond liability table

Operating income £250 per annum before bond interest expense.

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Operating income 250.00 250.00 250.00 250.00 250.00

Interest expense -6.75 -6.87 -6.99 -7.13 -7.26

Net profit 243.25 243.13 243.01 242.87 242.74

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Cash flow statement

Operating income 250.00 250.00 250.00 250.00 250.00

Interest expense -6.75 -6.87 -6.99 -7.13 -7.26

Add back non-cash interest

Net cash generated by

Proceeds from issue of bonds 100.00

Dividends paid to owners of the

Cash used to redeem bonds -110.00

Net cash from financing

Net increase in cash 101.75 1.87 1.99 2.13 -107.74

Cash at the beginning of the

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Other operating assets 350.00 350.00 350.00 350.00 350.00

Cash 126.75 128.62 130.61 132.74 25.00

Total assets 576.75 578.62 580.61 582.74 475.00

Shareholders equity 475.00 475.00 475.00 475.00 475.00

Bond liability 101.75 103.62 105.61 107.74 -

576.75 578.62 580.61 582.74 475.00

Scenario two - sukuk issue

Date Transactions Cash paid

31 December 2011 Trader plc pays rent to SPV 5.00

31 December 2012 Trader plc pays rent to SPV 5.00

31 December 2013 Trader plc pays rent to SPV 5.00

31 December 2014 Trader plc pays rent to SPV 5.00

31 December 2015 Trader plc pays rent to SPV 5.00

IFRS accounting for the sukuk transaction

Year Year Year Year

Income statement 31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Operating income 250.00 250.00 250.00 250.00 250.00

Financing expense under

Net profit 243.25 243.13 243.01 242.87 242.74

Year Year Year Year Year

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015

Cash flow statement

Operating income 250.00 250.00 250.00 250.00 250.00

Financing expense under

Add back non-cash

Net cash generated by

Proceeds from sukuk

Dividends paid to owners

Payment of sukuk financing obligation -110.00

Net cash from financing

Net increase in cash 101.75 1.87 1.99 2.13 -107.74

Cash at the beginning of