Accounting, Auditing and Governance Standards for Islamic Financial Institutions (IFI) by Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI)

Md. Mahabbat Hossain Faculty Member, BIBM Phone: 01716 37 3 6 !mail: mahabbat"bibm.or#.bd

$bout $$%IFI
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and hari!a standards for Islamic financial institutions and the industry" AAOIFI #as established in accordance #ith the Agreement of Association #hich #as signed by Islamic financial institutions on $ afar, $%$&' corresponding to () February, $**& in Algiers" Then, it #as registered on $$ +amadan $%$$ corresponding to (, -arch, $**$ in the tate of .ahrain" /rofessional 0ualification programs (notably 1I/A, the hari2a Adviser and Auditor 31 AA3, and the corporate compliance program) are presented no# by AAOIFI in its efforts to enhance the industry2s human resources base and governance structures" As an independent international organization, AAOIFI is supported by institutional members ((&& members from %& countries, so far) including central ban4s, Islamic financial institutions, and other participants from the international Islamic ban4ing and finance industry, #orld#ide" Islami .an4 .angladesh 5imited (I..5) is an Associate -ember of AAOIFI" AAOIFI has gained assuring support for the implementation of its standards, #hich are no# adopted in the 6ingdom of .ahrain, 7ubai International Financial 1entre, 8ordan, 5ebanon, 9atar, udan and yria" The relevant authorities in Australia, Indonesia, -alaysia, /a4istan, 6ingdom of audi Arabia, and outh Africa have issued guidelines that are based on AAOIFI2s standards and pronouncements" The ob:ectives of AAOIFI are; $" to develop accounting and auditing thoughts relevant to Islamic financial institutions< (" to disseminate accounting and auditing thoughts relevant to Islamic financial institutions and its applications through training, seminars, publication of periodical ne#sletters, carrying out and commissioning of research and other means< =" to prepare, promulgate and interpret accounting and auditing standards for Islamic financial institutions< and %" to revie# and amend accounting and auditing standards for Islamic financial institutions" AAOIFI carries out these ob:ectives in accordance #ith the precepts of Islamic hari2a #hich represents a comprehensive system for all aspects of life, in conformity #ith the environment in #hich Islamic financial institutions have developed" This activity is intended both to enhance the confidence of users of the financial statements of Islamic financial institutions in the information that is produced about these institutions, and to encourage these users to invest or deposit their funds in Islamic financial institutions and to use their services" Total of >> standards are issued by AAOIFI-(a) %> on hari2a, (b) () accounting, (c) ? auditing standards, (d) , governance, (e) ( codes of ethics" In addition, ne# standards are being developed and e@isting standards revie#ed" AAOIFI standards are follo#ed A as part of regulatory re0uirement or IFIs2 internal guidelines A $

in :urisdictions that offer Islamic finance across -iddle Bast, Asia /acific, outh Asia, 1entral Asia, Africa, Burope, and Corth America< and Islamic 7evelopment .an4 Droup" 1onse0uently, AAOIFI standards have introduced greater harmonization of Islamic finance practices across the #orld"

$ccountin# & $uditin# 'tandards Board ($$'B)

The tandards .oard is composed of t#enty part-time members #ho are appointed by the .oard of Trustees for a five-year term" AA . may form sub-committees or technical #or4 teams from among its members or from others, and shall determine their terms of reference, po#ers and manner in #hich they shall conduct their business li4e Accounting tandards 1ommittee, Auditing and Dovernance tandards 1ommittee, etc" AA . shall convene meeting at least t#ice a year on the invitation of its 1hairman or at the re0uest of (?E of its members submitted to the 1hairman" The Accounting and Auditing tandards .oard!s meetings shall be deemed valid if the ma:ority of its members are present in person or by pro@y" The Accounting and Auditing tandards .oard!s resolutions shall be adopted by the ma:ority of the votes of the members present in person or by pro@y" In case of a tie, the 1hairman of the .oard shall have the casting vote" In the event that the term of office of a member of the Accounting and Auditing tandards .oard e@pires for reason of death, resignation, disability or removal from office, the .oard of Trustees shall appoint a successor to fill the vacancy(s) sub:ect to that a member shall be appointed to fill a vacant office by a ma:ority of votes of members of the .oard of Trustees, and shall belong to the same category of the member #hose office had been vacated and the term of office of a member appointed to fill a vacancy shall terminate upon the e@piry of the original term of the member #hose office had become vacant"

$ccountin# 'tandards *e+elo,ed by $$%IFI

FA $; 1onceptual Frame#or4 for Financial +eporting by Islamic Financial Institutions FA $; Deneral /resentation and 7isclosure in the Financial tatements of Islamic .an4s and Financial Institutions FA (; -urabaha and -urabaha to the /urchase Orderer FA =; -udaraba Financing FA %; -ushara4a Financing FA ?; 7isclosure of .ases for /rofit Allocation bet#een O#ners2 B0uity and Investment Account 'olders FA ); B0uity of Investment Account 'olders and their B0uivalent FA ,; alam and /arallel alam FA >; I:arah and I:arah -untahia .ittamlee4 FA *; Fa4ah FA $&; Istisna!a and /arallel Istisna2a FA $$; /rovisions and +eserves FA $(; Deneral /resentation and 7isclosure in the Financial tatements of Islamic Insurance 1ompanies FA $=; 7isclosure of .ases for 7etermining and Allocating urplus or 7eficit in Islamic Insurance 1ompanies (

FA FA FA FA FA FA FA FA FA FA FA FA FA

$%; Investment Funds $?; /rovisions and +eserves in Islamic Insurance 1ompanies $); Foreign 1urrency Transactions and Foreign Operations $,; Investments $>; Islamic Financial ervices offered by 1onventional Financial Institutions $*; 1ontributions in Islamic Insurance 1ompanies (&; 7eferred /ayment ale ($; 7isclosure on Transfer of Assets ((; egment +eporting (=; 1onsolidation (%; Investments in Associates (?; Investment in u4u4, hares and imilar Instruments (); Investments in +eal Bstate

$uditin# 'tandards ($') *e+elo,ed by $$%IFI

A A A A A $; Ob:ective and /rinciples of Auditing (; The Auditor2s +eport =; Terms of Audit Bngagement %; Testing for 1ompliance #ith hari2a +ules and /rinciples by an B@ternal Auditor ?; The Auditor2s +esponsibility to 1onsider Fraud and Brror in an Audit of Financial tatements

-o+ernance 'tandards (-') *e+elo,ed by $$%IFI

D D D D D D D $; haria upervisory .oard; Appointment, 1omposition, +eport (; hari2a +evie# =; Internal hari2a +evie# %; Audit G Dovernance 1ommittee for Islamic Financial Institutions ?; Independence of hari2a upervisory .oard ); tatement on Dovernance /rinciples and 7isclosure for Islamic Financial Institutions ,; 1orporate ocial +esponsibility 1onduct and 7isclosure for Islamic Financial Institutions

!thics *e+elo,ed by $$%IFI

1B $; 1ode of Bthics for Accountants and Auditors of Islamic Financial Institutions 1B (; 1ode of Bthics for the Bmployees of Islamic Financial Institutions

-uidance .otes: First time Adoption of AAOIFI Accounting tandards by an IFI 'hari/a 'tandards *e+elo,ed by $$%IFI: 0otal ''s 12 Brie3 *escri,tion on $ccountin# 'tandards *e+elo,ed by $$%IFI
=

'F$ 1: 4once,tual Frame5or6 3or Financial 7e,ortin# by Islamic Financial Institutions tatement of Financial Accounting ( FA) $ is the Conceptual Framework for Financial Reporting by Islamic Financial Institutions. The 1onceptual Frame#or4 (1F) introduces the main ob:ectives as #ell as the concepts underlying financial accounting and reporting by IF s" The ob:ective of financial accounting and reporting is the foundation of the 1onceptual Frame#or4" The concepts flo# from the ob:ectives and they represent a frame#or4 of principles underlying financial reporting" It provides the basis for the financial accounting standards of AAOIFI" The principles set forth in this 1F are consistent #ith the precepts of the Islamic hariah" The 1F helps a better understanding of accounting information included in general purpose financial reports and, in turn, enhances confidence in IFIs" An IFI preparing financial statements (F ) under financial accounting standards (FA ) of AAOIFI is re0uired to consider the 1F #here there is no FA that specifically applies to a transaction, other event, or condition that deals #ith similar and related issue" 7eco#nition Assets and Liabilities Recognition/De-recognition Assets and 5iabilities or financial right and obligations are recognized or derecognized #hen they satisfy certain criteria" 1hanges in those rights and obligations are #hen they result from consummated transactions or other event during a given period" 7e-recognition is the removal of an assets or liability that no longer meets the recognition criteria" Revenue and Expense Recognition The basic principle for revenue recognition is that revenues should be recognized #hen earned" The earning process should be complete or virtually complete, there should be an obligation on the part of other party and the amount of revenue should be 4no#n and should be collectible #ith reasonable degree of certainly, it not already collected" The basic principle for e@pense recognition is occurrence either because the e@pense relates directly to the earning of revenues that have been realized and recognized or because it relates to a certain period covered by the income statement" 0he $ccountin# 8nit 4once,t The accounting unit concept re0uires the identification of economic activities that are associated #ith the IFI as a separate entity and can be e@pressed as the entity2s assets, liabilities, revenues, e@penses, gains and losses, net income and net loss" 0he -oin# 4oncern 4once,t In the absence of persuasive evidence the contrary, financial accounting assumes the continuation of an entity as a going concern" Periodicity 4once,t There is an obligation on IFIs to present periodic reports reflecting their financial position as of a given date and the result s of their operations during a specific period in order to disclose the right and obligations of the IFI and those of interested parties"

$ccrual Basis and 4ash Basis o3 $ccountin# The accrual concept allo#s an IFI to prepare financial statements that provide interested parties #ith information or directions by #hich they can evaluate the performance of the IFI during a relevant period" This concept #hen adopted re0uires that financial accounting effects of transactions and other events are recognized and recorded in the accounting records as and #hen they occur and they are reported in the financial statements of the periods to #hich they relate" On the other hand, cash basis of accounting represents the adoption of policy to record and recognize transactions, events and circumstances or condition #hereby the financial accounting effects are recognized and recorded in the accounting records as cash or its e0uivalent is received or paid and they are reported in the financial reports of the periods to #hich the receipts or payments relate" Hnder certain circumstances, the adoption of the cash basis of accounting becomes relevant, for instance, upon the li0uidation or impending li0uidation of the IFI" 0he 9ualitati+e 4haracteristics o3 $ccountin# In3ormation 'igh 9uality o True and fair vie# o 7ecision usefulness o Transparency +elevance o o o o /redictive value Feedbac4 value Timeliness Hnderstandability

+eliability o +epresentational faithfulness o Ceutrality o ubstance and form o 1ompleteness o Ierifiability o 1onsistency 1omparability /rudence -ateriality 1ost effectiveness

F$'1: -eneral Presentation and *isclosure in the Financial 'tatements o3 Islamic Ban6s and Financial Institutions Financial Accounting tandard (FA ) $; General Presentation and Disclosure in the Financial Statements of Islamic anks and Financial Institutions is applicable to the F published by Islamic .an4s (I.) to meet the common information needs of the main users of such statements" This standard is applicable to all I.s regardless of their legal form, countries of incorporation, or size" hould the re0uirements of this standard contradict the ban42s charter or the la#s and regulations of the country in #hich it operates a disclosure should be made of the contradictions and the impact of promulgated standards on the relevant elements of the financial statements" F$' :: Murabaha and Murabaha to the Purchase %rderer This standard shall apply to the assets available for sale by -urabaha and -urabaha to the purchase orderer, the revenues, e@penses, gains and losses attributable to such an asset as #ell as -urabaha receivables" This shall apply #hether the Islamic ban4 buys these assets e@clusively from its o#n funds, from the pool of commingled funds comprising the Islamic ban4!s o#n funds and unrestricted investment accounts, or from restricted investment account funds" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, and the Islamic ban4 had to comply #ith such re0uirements, a disclosure should be made of the contradiction" F$' 3: Mudaraba Financin# This standard shall apply to -udaraba financing transactions carried out by the Islamic ban4 as a provider of funds and the transactions related to the capital provided by the Islamic ban4 to be used in a -udaraba, from the time of its inception to the time of its completion" This shall apply #hether the Islamic ban4 finances the -udaraba capital e@clusively from its o#n funds, from the pool of commingled funds comprising the Islamic ban4!s o#n funds and unrestricted investment accounts or from restricted investment accounts" The standard shall also apply to the transactions pertaining to the Islamic ban4!s share in -udaraba profits or losses" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich is operates, a disclosure should be made of the contradiction" This standard does not address the follo#ing; The accounting treatment of -udaraba transactions in the mudarib (client) boo4s as #ell as the -udaraba boo4s" The Islamic ban4!s receipt of unrestricted investment accounts funds #hich are characterised as -udaraba from a hari!a perspective" The Islamic ban4!s receipt of restricted investment account funds #hether in its capacity as mudarib or agent" Fa4ah of -udaraba fund"

F$' 1: Mushara6a Financin# This standard shall apply to -ushara4a financing transactions carried out by Islamic ban4s #hether by means of a constant -ushara4a (short- or long-term) or a diminishing -ushara4a (one #hich ends in transferring o#nership to one party)" This shall apply #hether the Islamic ban4 finances its share in -ushara4a capital e@clusively from its o#n funds, from the pool of commingled funds comprising the Islamic ban4!s o#n funds and unrestricted investment accounts or from restricted investment accounts" The standard shall also apply to the transactions pertaining to the Islamic ban4!s share in -ushara4a profits or losses" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the contradiction" This standard does not include the follo#ing; -udaraba /articipations Fa4ah on -ushara4a funds Accounting treatment of -ushara4a transactions in the partner!s (client!s) boo4s and the -ushara4a records"

F$' : *isclosure o3 Bases 3or Pro3it $llocation bet5een %5ners/ !;uity and In+estment $ccount Holders This standard for disclosure of bases for profit allocation bet#een o#ners! e0uity and investment account holders is applicable to the financial statements published by Islamic ban4s to meet the common information needs of the main users of such statements" This standard is applicable to all Islamic ban4s regardless of their legal form, countries of incorporation or size" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' 6: !;uity o3 In+estment $ccount Holders and their !;ui+alent This standard addresses the accounting rules relating to funds received by the Islamic ban4 for investment in its capacity as a mudarib at the Islamic ban4!s discretion, either in #hatever manner the Islamic ban4 deems appropriate (e0uity of unrestricted investment account holders) or sub:ect to certain restrictions (e0uity of restricted investment account holders)" hould the re0uirements of this standard be in conflict #ith the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the point of conflict" This standard does not address the follo#ing; The funds received by the Islamic ban4 on a basis other than the -udaraba contract, for e@ample; Funds received for investment on the basis of agency for a specified fee" 1ash margins and their e0uivalent" 1urrent accounts and their e0uivalent" .alances of other financial institutions" 'o# to calculate Fa4ah on e0uity of investment account holders" ,

F$' 7: 'alam and Parallel 'alam This standard addresses the accounting rules of alam financing and parallel alam transactions" This includes the treatment of ras!almal paid by the Islamic ban4 in a alam transaction or that #hich it receives in a parallel alam transaction, the receipt and sale of al!mus"am fihi in a alam transaction or the delivery of its li4e in a parallel alam transaction" The standard also includes the treatment of revenues, e@penses, gains and losses relating to alam financing and parallel alam transactions" hould the re0uirements of this standard be in conflict #ith the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the point of conflict" F$' 2: I<arah and I<arah Muntahia Bittamlee6 This standard addresses the accounting rules relating to I:arah and I:arah -untahia .ittamlee4 in #hich the Islamic ban4 is a lessor or a lessee, including the ac0uisition of assets for I:arah, I:arah e@penses, revenues, gains and losses" hould the re0uirements of this standard be in conflict #ith the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the point of conflict" This standard does not address the follo#ing; I:arah agreements for e@ploration or use of natural resources, such as oil, gas, timber, metals, and the li4e" I:arah transactions concerning licensing agreements of certain items such as motion pictures, video recordings, manuscripts, patents, and copyrights" 5abour contracts and hiring of professional services"

F$' =: >a6ah This standard shall apply to the accounting treatments related to the determination of the Fa4ah base, measurement of items included in the Fa4ah base and disclosure of Fa4ah in the financial statements of the Islamic ban4" hould the re0uirements of this standard contradict #ith the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the point of conflict" F$' 10: Istisna?a and Parallel Istisna/a This standard addresses the accounting rules of Istisna!a and parallel Istisna!a contracts in the financial statements of Islamic ban4s relating to measuring and recognizing the costs and revenues from Istisna!a and parallel Istisna!a, the gains and losses accruing there from, and their presentation and disclosure in the financial statements of the Islamic ban4" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates and the Islamic ban4 had to comply #ith such re0uirements, a disclosure should be made to the point of conflict"

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F$' 11: Pro+isions and 7eser+es This standard shall apply to the provisions formed by the Islamic ban4 to revalue its receivables, financing and investment assets" 'o#ever, if losses have occurred relating to off-balance sheet items, provisions shall be made for such losses" The standard shall also apply to the reserves set aside by the Islamic ban4, either from the mudaraba income, before allocating the mudarib share, (profit e0ualization reserve), or from the profit of investment account holders, after allocating the mudarib share (investment ris4 reserves)" The standard shall not apply to the reserves of o#ner!s e0uity that are set aside by the Islamic ban4 from its earnings to comply #ith legal re0uirements (e"g" statutory reserves) or the reserves set aside to meet general re0uirements because these reserves belong to o#ner!s e0uity and not restricted or unrestricted investment account holders" The standard also shall not apply to depreciation provision, #hich is an ad:ustment to the boo4 value of assets" hould the re0uirements of this standard contradict the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the contradiction" F$' 1:: -eneral Presentation and *isclosure in the Financial 'tatements o3 Islamic Insurance 4om,anies This standard is applicable to the financial statements prepared by the company to meet the common information needs of the main users of such statements" This standard is applicable to all companies regardless of their legal form, countries of incorporation, or size" hould the re0uirements of this standard conflict #ith the company!s charter or the la#s and regulations of the country in #hich it operates a disclosure should be made of the conflict and the impact on the relevant elements of the financial statements, #herever possible" F$' 13: *isclosure o3 Bases 3or *eterminin# and $llocatin# 'ur,lus or *e3icit in Islamic Insurance 4om,anies This standard is applicable to all financial statements prepared by the companies in order to meet the common information needs of the main users of such statements" The standard is applicable to all companies regardless of their legal form, countries of incorporation or size" hould the re0uirements of this standard be in conflict #ith a company!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' 11: In+estment Funds This standard shall apply to funds #hich are established and managed in accordance #ith Islamic hari!a rules and principles, and are financially independent of the institutions that establish them" The Funds may or may not be managed by the institutions that establish them, and may or may not be separate legal entities" Iarious investors contribute to the capital of these funds in the form of shares or units of e0ual value, #hich represent o#nership claims to the assets of the Funds and entitlement to profits or losses" This standard shall not apply to; (a) Funds that are accounted for in the statement of financial position of the establishing institution< and (b) Funds of restricted investment accounts that are not in the form of shares or units"

hould the re0uirements of this standard be in conflict #ith the Fund!s charter or the la#s of the country in #hich it operates, a disclosure should be made of the conflict" F$' 1 : Pro+isions and 7eser+es in Islamic Insurance 4om,anies This standard shall apply to the main technical provisions that are established by the companies for general insurance operations (property and casualty insurance)" The standard shall also apply to; (a) the deficit reserves #hich are set aside by the company from the surplus before it is allocated to policyholders, to ma4e provision against future losses< (b) the e0ualization reserve #hich is established by the company to mitigate the effect of e@ceptionally high loss ratios for classes of insurance operations displaying a high degree of claims volatility" The standard shall not apply to the reserves #ithin o#ners! e0uity that are set aside by the company from its earnings to comply #ith legal re0uirements or to meet general re0uirements" The standard also shall not apply to the depreciation provision, #hich is an ad:ustment to the boo4 value of assets" hould the re0uirements of this standard be in conflict #ith the company!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the conflict" F$' 16: Forei#n 4urrency 0ransactions and Forei#n %,erations This tandard sets out the accounting rules for recognizing, measuring, presenting and disclosing transactions in various currencies other than the reporting currency of the Islamic ban4, #hether such transactions relate to assets, liabilities, off-balance sheet items, revenues, e@penses, gains or losses in the financial statements" The tandard also covers accounting for net investments in foreign operations of an Islamic ban4 #hich prepares its financial statements in a currency #hich is different from the reporting currency of the Islamic ban4 (foreign operations)" B@amples of such foreign operations are branches, subsidiaries #hich prepare their financial statements in a currency #hich is different from the reporting currency of the Islamic ban4" The tandard also applies to foreign currency transactions and foreign operations in the statement of changes in restricted investments" hould the re0uirements of this standard be in conflict #ith the Islamic ban4!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' 17: In+estments This standard shall apply to the institution!s investments, #hether in the form of direct investments, investment funds or investment portfolios, in su4u4 (Islamic bonds), shares, and real estate" The funds invested represent either the institutions! o#n funds, the funds of unrestricted investment accounts or both or the funds of restricted investment accounts" F$' 12: Islamic Financial 'er+ices o33ered by 4on+entional Financial Institutions This standard shall apply to the institutions #hich offer Islamic financial services in addition to their conventional financial services" This standard sets out the accounting rules only for the Islamic financial services offered by these institutions" $&

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F$' 1=: 4ontributions in Islamic Insurance 4om,anies This standard shall apply to the contributions made on the basis of donation by the policyholders relating to general insurance" The standard shall also apply to the portion of contributions made on the basis of donation by the policyholders relating to insurance on persons (Ta4aful)" The standard shall not apply to the portion in the contributions that relate to investment or saving in insurance on persons" hould the re0uirements of this standard be in conflict #ith the company!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the conflict" F$' :0: *e3erred Payment 'ale This standard shall apply to; (a) assets available for deferred payment sale, (b) the revenues, e@penses, gains and losses relating to these assets, and (c) receivables arising from deferred payment sale transactions" This applies #hether the institution has o#ned or purchased the assets from its o#n funds, the funds of unrestricted investment accountholders, the funds of restricted investment accountholders, from other sources, or from all of these sources" This standard shall also apply to any liabilities, reduction of profit due to early settlement, and additional amounts charged on the outstanding debt of a delin0uent debtor" hould the re0uirements of this standard be in conflict #ith the institution!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the point of conflict" F$' :1: *isclosure on 0rans3er o3 $ssets This standard shall apply to the operations of transferring assets bet#een different investment accounts conducted by institutions" These transfers shall include the follo#ing; The transfer of assets from Hnrestricted Investment Accounts to +estricted Investment Accounts and vice versa" The transfer of assets from Investment Accounts (+estricted or Hnrestricted) to O#ners! B0uity and vice versa" The transfer of assets from +estricted Investment Accounts to other +estricted Investment Accounts, ta4ing into consideration the differences in restrictions in the accounts" The transfer of assets from Investment Accounts and O#ners! B0uity to the Investment Funds andJor pecial /urpose Iehicles ( /I) and vice versa"

The assets to be transferred shall include all tangible and financial assets" If the re0uirements of this standard are in conflict #ith the institution!s charter or the la#s and regulations of the country in #hich it operates, a disclosure shall be made of the conflict"

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F$' ::: 'e#ment 7e,ortin# This standard is applicable to a set of financial statements #hich includes statement of financial position (balance sheet) and income statement, prepared and published by Islamic financial institutions (IFls), regardless of their legal form, country of incorporation or size" egment information is to be presented for each of the parent, subsidiary or associate!s separate financial statements" 'o#ever, if both consolidated financial statements of an IFI or its subsidiary or associate and the separate financial statements of the parent institution are presented together, segment information need only be presented on the basis of the consolidated financial statements" This tandard should be applied by institutions irrespective of #hether their securities are publicly traded or privately held, or are in the process of issuing securities in public securities mar4et" hould the re0uirements of this standard be in conflict #ith an institution!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' :3: 4onsolidation This standard is applicable to the consolidated financial statements prepared and presented by an Islamic financial institution (IFI) as a parent entity" This standard sets out the principles for determining entities that are sub:ect to be included in the consolidated financial statements of a parent and prescribes the accounting for investment in subsidiaries by parent" 1onsolidation shall also apply in case of pecial-/urpose Iehicle ( /I)3#hich is an entity established to carry out specific activities and accomplish specific ob:ectives, e@cept if the /I is established for the benefit of party or parties other than the IFI" hould the re0uirements of this standard be in conflict #ith an IFl!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' :1: In+estments in $ssociates This standard is applicable to financial statements prepared and presented by an Islamic financial institution (IFI)" This standard sets out the principles for determining entities that are deemed to be associates and prescribes the accounting for investments in associates by parent reporting entity" This standard shall not apply to investments made by venture capital entities, by mutual funds and similar entities" hould the re0uirement of this standard be in conflict #ith an IFl!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made to that effect" F$' : : In+estment in 'u6u6, 'hares and 'imilar Instruments This standard shall apply to the entity!s investment, #hether in the form of direct investments, investments through structured products, investment funds or investment portfolios, su4u4, other debt-type instruments or shares" This standard shall not be applied for accounting of; investment in entity!s o#n e0uity instruments< investment that re0uire special accounting treatment such as consolidation of investments in subsidiaries and e0uity accounting of investment in associates< investment in real estate< $=

Investment in contracts #ith insurance and discretionary participation features< and contracts and transactions covered by Financial Accounting tandard Co" (=) -udaraba Financing, Financial Accounting tandard Co"(%) -ushara4a Financing, Financial Accounting tandard Co"(,) alam and /arallel alam, and Financial Accounting tandard Co" ($&) Istisna!a and /arallel lstisna!a"

hould the re0uirements of this standard be in conflict #ith the entity!s charter or the la#s and regulations of the country in #hich it operates, a disclosure should be made of the conflict" F$' :6: In+estments in 7eal !state

$uditin# 'tandards ($') *e+elo,ed by $$%IFI

The purpose of this Auditing tandard (A ) for IFI is to establish standards and provide guidance on the ob:ectives and general principles governing an audit of F s prepared by a financial institution #hich conducts business in conformity #ith Islamic hariah +ules and /rinciples" The ob:ective of an audit of F s is to enable the auditor to e@press an opinion as to #hether the F s are prepared, in all material respects, in accordance #ith the hariah +ules and /rinciples, the Accounting tandards of the AAOIFI and relevant national accounting standards and practices in the country in #hich the financial institution operates" The auditor2s report should contain a clear #ritten e@pression of opinion on the F s ta4en as a #hole" A s also provide guidance on the appointment of an auditor to audit the F s" They provide guidance on the sub:ect of testing for compliance #ith hariah +ules and /rinciples by an e@ternal auditor in connection #ith the audit of the F s" These also provide guidance on the auditor2s responsibility #hen considering the ris4 of fraud and error in an audit of F s"

!thics *e+elo,ed by $$%IFI

1B $; 1ode of Bthics for Accountants and Auditors of Islamic Financial Institutions 1B (; 1ode of Bthics for the Bmployees of Islamic Financial Institutions

7e3erence
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI)" ((&$&)" #ccounting$ #uditing and Go%ernance Standards for Islamic Financial Institutions$ .ahrain 555.aaoi3i.com, 5ebsite o3 $$%IFI, cited on February =, :011 $%