IASB Group to Tackle Application of IFRS 9 'Financial Instruments' to Islamic finance

The application of IFRS 9 'Financial Instruments' to Islamic finance will be discussed by the International Accounting Standard Board's Consultative Group for Shariah-Compliant Instruments and Transactions during a meeting in Kuala Lumpur next month.

The working group was formed as a result of the IASB's 2011 agenda consultation and held an initial meeting in Kuala Lumpur in July 2013.

The group intends to address the application of IFRS 9's classification and measurement principles; and the application of the IASB's proposed lease standard to Ijarah.

The group also wants to address whether restricted and unrestricted investment accounts are to be presented on- or off-balance sheet; and profit equalization reserves (PER) because of significant differences in practice.

The upcoming discussion in Kuala Lumpur will address the first of these points and will be based on a staff paper made recently available on the IASB's website.

The paper identifies three main issues that need to be considered, the first one being which IFRS applies to the accounting of Islamic financial instruments.

Instruments in Islamic Finance are trade-based and designed to finance the purchase and sale of tangible and intangible, as opposed to financial assets.

This issue, then, is whether the purchase and sale contracts with deffered payment described in paragraph 10 are "contracts with customers" within the scope of IFRS 15.

The second issue identified by the paper focuses on whether some of the instruments common in Islamic Finance meet the characteristics-of-the-instrument test in IFRS 9.

The references to "principal and interest" are persvasive in IFRS 9's classification system and IFRSs generally. Shariah-compliant instruments do not include explicit interest, but the same could be said of some instruments in conventional finance, notably zero-coupon bonds.

Three banks studied by the group have adopted IFRS 9 and have concluded that some of their financial assets meet the characteristics-of-the-instrument test.

Finally, the third issues involve the description and measurement of income from Islamic instruments.

Most of the banks studied by the group present their revenue from instruments as "finance income" or a similar term rather than as "interest income" for obvious reasons, notes the paper.

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