30th November 2021, Manama, Kingdom of Bahrain | Aligned with its role as an advocate of the Islamic financial services industry (IFSI), the General Council for Islamic Banks and Financial Institutions (CIBAFI), the global umbrella of Islamic financial institutions, announced that it has submitted its comments today to the Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI). The submission included comments on the Exposure Drafts (EDs) on “Accounting for Takaful: Recognition and Measurement”, the Revised Financial Accounting Standard (FAS) 12: “Presentation and Disclosures in the Financial Statements of Takaful Institutions”, and the Revised FAS 18: “Financial Reporting for Islamic Financial Services Offered by Conventional Financial Institutions”.

The EDs have been issued on 30th August 2021 and were open for public consultation until 30th November 2021.

In its comments, CIBAFI thanked the AAOIFI for giving the opportunity to the Islamic financial services industry to comment on the EDs and provided collective feedback of its member institutions from over 34 jurisdictions, comprising the following key points.

Accounting for Takaful: Recognition and Measurement

First, the ED defines some concepts for purpose of interpreting and applying to this standard. The term Tabarru is not clearly defined and therefore, for better understanding, it is recommended to be defined separately in the definition section of the standard to avoid any confusion. Also, the term “avoidance” which has a particular meaning in the insurance sector is observed to be not appropriate in the context used. It was thus recommended to replace “avoidance” with “mitigation”.

Second, it is noticed that the ED discussed the approach to Qard Hasan but also mentioned that the participants’ Takaful fund (PTF) shall repay the Qard Hasan when it next accrues a surplus (and/or has enough liquidity). CIBAFI and its members note that this may have some regulatory implications and may need further clarification.

For more details about the comments of the Exposure Drafts (EDs) on “Accounting for Takaful: Recognition and Measurement”, please click here.

 

Revised FAS 12: Presentation and Disclosures in the Financial Statements of Takaful Institutions

First, CIBAFI and its members noted that there are some areas in which the ED appears restrictive, though these may be oversights. One is that it seems to envisage that Takaful institutions will have no more than one participants’ Takaful fund (PTF) and no more than one participants’ investment fund (PIF). The ED also assumes that a Takaful institution will have external shareholders; it is recommended to consider how this will be applied in a pure mutual model.

Second, the ED adds new definitions that do not exist in the previous standard. One definition is on “re-Takaful” where CIBAFI and its members believe it would be better if a reference is made to Shariah Standard 41 on “Islamic Reinsurance” where a definition of re-Takaful already exists. It is also recommended review the terms and definitions to ensure they are consistent with the other existing standards.

For more details about the comments of the Revised FAS 12: Presentation and Disclosures in the Financial Statements of Takaful Institutions, please click here.

Revised FAS 18: Financial Reporting for Islamic Financial Services Offered by Conventional Financial Institutions

First, the ED sets the scope of the conventional institutions to which the ED applies. These include capital markets institutions, which CIBAFI and its members consider to be, at least at present, too broad an extension of scope. Many capital markets institutions, for example, brokers or financial advisers, function as intermediaries, and the Islamic financial services they offer – for example dealing on behalf of clients wishing to invest in Sukuk – would not be readily susceptible to this accounting treatment.

Second, the ED highlights the financial reporting models for Islamic finance windows. A conventional financial institution having an Islamic finance window will need to opt for one of these models. It is recommended to provide further guidance to identify which of the models is most suitable for the conventional bank to choose.