Accounting for Islamic Banks
This domain tests AAOIFI financial accounting standards, the profit distribution waterfall, and the treatment of investment accounts.
Standards
FAS 2 murabaha, FAS 3 mudaraba, FAS 4 musharaka, FAS 5 disclosure of profit allocation bases, FAS 6 equity of investment account holders, FAS 7 salam, FAS 8 ijarah, FAS 9 zakat, FAS 10 istisna, FAS 14 investment accounts, FAS 15 provisions and reserves, FAS 28 revised murabaha.
Recognition principles
- Murabaha profit is deferred at inception and recognised over the financing period; the receivable is measured at cost plus profit.
- Ijarah assets are capitalised and depreciated; rental income accrues over the lease term.
- Musharaka is accounted for under the equity method; mudaraba financing is a receivable.
- Investment accounts are presented in the equity of IAH, split into unrestricted and restricted, not as liabilities.
Profit distribution waterfall
- Gross income less expenses → profit.
- Deduct PER from profit before allocating to IAH and shareholders.
- Allocate by weighted IAH share and the mudaraba ratio.
- Deduct IRR from the IAH share.
- Distribute the remainder.
Worked example
Profit $10m; PER 5% = $0.5m, leaving $9.5m. IAH weight 70% → $6.65m attributed to IAH; ratio 70:30 in IAH's favour → IAH share $4.655m, bank $1.995m. IRR 10% of the IAH share = $0.4655m retained; IAH credited $4.1895m. The remaining $2.85m goes to owners' equity.
Traps
Recognising full murabaha profit at inception; deducting PER after allocation; treating IAH funds as deposits.