Murabaha Receivable Impairment and the Cost-Plus Disclosure
A retail Islamic bank has a murabaha portfolio with a gross carrying amount of 480 million. Of this, 60 million relates to customers who are 95 days past due but the bank's credit team argues the delay is administrative and expects full recovery. The bank's policy under the internal model estimates a 12-month expected credit loss of 3.1 million on the performing book and a lifetime ECL of 11.4 million on the 60 million impaired bucket. Historically the bank recognised only specific provisions when a receivable passed 180 days. Management wants to keep the old 180-day trigger to avoid a 2025 profit hit; the CFO notes the murabaha profit was recognised on an accrual basis and 4.2 million of accrued but unpaid profit sits inside the 60 million. The auditor asks how the receivable should be measured and whether accrued profit on the impaired accounts should continue to accrue.
1. Should the bank retain its 180-day specific-provision trigger, or recognise an allowance on the 95-day bucket now? Justify under the applicable AAOIFI financial accounting framework.
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AAOIFI FAS 30 (Impairment and Credit Losses) requires an expected credit loss approach, not an incurred-loss trigger. The 180-day policy is an incurred-loss convention and cannot be used to defer recognition. Two components must be separated:
- Performing book (420m): recognise the 12-month ECL of 3.1m as an allowance.
- The 60m bucket: a significant increase in credit risk (95 days past due is a rebuttable but strong indicator) moves the exposure to lifetime ECL. Recognise 11.4m.
Total allowance = 14.5m. The profit smoothing motive is irrelevant; the standard is about faithful representation of expected recoveries. The auditor should insist on the ECL model and disclosure of the staging criteria. If management cannot rebut the SICR presumption, the lifetime figure applies.
2. How should the 4.2m of accrued but unpaid profit inside the impaired bucket be treated, and what is the net carrying amount after the allowance?
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Under the AAOIFI murabaha model, profit is recognised on an accrual (time-apportioned) basis over the murabaha term, but where collection of the profit becomes doubtful the accrued profit should not continue to be recognised as income; it should be suspended/reversed against income. So the 4.2m accrued profit attributable to the impaired accounts should be derecognised from income (or suspended) rather than carried as an asset at full value.
Net carrying amount calculation:
- Gross receivable: 480.0m
- Less suspended accrued profit on impaired accounts: (4.2m)
- Adjusted gross: 475.8m
- Less ECL allowance: (14.5m)
- Net carrying amount = 461.3m
The bank should disclose the gross amount, the allowance, the suspended profit, and the staging basis. Continuing to accrue profit on non-performing murabaha would overstate income and is inconsistent with the prudence and faithful-representation requirements.