CONFIDENTIAL 1 AC/JUN 2017/FAR618
SOLUTION
PART A
QUESTION 1
a) Difference between AAOIFI and IFRS on the principle of
Principle AAOIFI
Substance over form AAOIFI recognize the
importance of legal form over
substance as such AAOIFI
standards require both Operating
Ijarah and
IjarahMuntahiaBittamleek to be
treated similar to Operating
Lease.
Time value of money AAOIFI does not recognize time
value of money as charging
interest rates is consistent with
the concept of riba and thus, it is
prohibited in Islam
1 point = 1.5 marks
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IFRS
Substance over form is an
accounting concept which
means that the economic
substance of transactions
and events must be
recorded in the financial
statements rather than just
their legal form in order to
present a true and fair view
of the affairs of the entity.
For example in MFRS 117,
even though an asset may
be leased to a lessee without
the transfer of legal title at
the end of the lease term,
such a lease may, in
substance, be considered as
a finance lease if for
instance the lease term is
substantially for entire useful
life of the asset or the lease
agreement entitles the
lessee to purchase the asset
at the end of the lease term
at a very nominal price
Time value of money in IFRS
is referring to net present
value calculated using
discounting factor which
reference to interest rates in
order to
recognise the time value
involved. For example in
MFRS 116, when the
payment of asset is deferred,
the value of the asset is
recognized at net present
value to take into account
the time value involved.
4 x 1.5 = 6 marks
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b)

MASB with the advice of Syariah Advisory Council of

Bank Negara Malaysia which concluded that the conventional accounting concepts and
generally accepted accounting principles could be applied to Islamic financial transactions with
additional disclosures to explain the use of Islamic contracts/

Therefore, Shariah compliant transactions and events shall be accounted for in accordance with
MASB approved accounting standards, unless there is a Shariah prohibition./

Any 2 accounting concepts in IFRS/MASB are accepted.

1. Monetary unit concept./

It was found the the accounting unit concept i.e. the entity created as a separate unit of
accountability is acceptable in Islam as it resembles the widely practiced of waqf (trust
foundation) and Baitul Mal (Islamic Treasury) in Muslim traditions/. Thus accounting unit
concept requires the identification of economic activities that are associated with the Islamic
financial institution’s assets, liabilities, revenues, expenses, gains and losses./

2. Going Concern concept/

It is applicable as many Islamic financial contracts especially musharakah and

mudharabah are for a number of specific periods. We have to assume that the contract shall
continue until one or all of the parties involved decide to terminate such contracts./ Going
concern is an assumption the business or the entity as a going concern or to continue for
foreseeable future unless there is a significant evidence to the contrary./ Tus, this assumption
is important especially for Islamic Banks as it assumed, based on financial position and
performance, the continuity of the bank’s activities in the future including its investment
activities.

3. Periodicity concept

The conventional accounting periodicity concept is also acceptable in Islam on the basis
that even in the case of zakat, it is being paid once a year as a period of measurement. The
concept of haul determined that the wealth must be owned at least one year to qualify for the
payment of zakat. Thus, the periodicity concept for an Islamic financial institution means the life
of the institution can be broken into reporting periods to prepare financial reports to the
interested parties and stakeholders. This will assist the users to periodically evaluate the
institution’s financial performance and position. In addition, the periodic preparation of the
financial statements will be useful to determine the financial obligations and the financial rights
of the bank and other interested parties.

4. Monetary Unit concept

AAOIFI also found that the stability of the purchasing power of the monetary unit is
acceptable to be used as one the main assumption. As financial accounting uses monetary unit
of a given currency as a common denominator, this will assist the users to usefully evaluate the

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financial performance and position during a specific time. If there is a need to revalue the
assets and liabilities, these can be accounted for and undertake annually at the end of financial
peiod and specific disclosures are required. This will assist the users to be provided proper
information on the financial performance and position of a business entity.

( 8 / x 1 = 8 marks)
(Total: 14 marks)

QUESTION 2

a. Classification of sukuk based on FAS 17:

Mudaraba (Muqaradah) sukuk

These are investments in sukuk that represent ownership of units of equal value in the
mudarabahequity and are registered in the names of holders on the basis of undivided
ownership of shares in the mudarabah equity and its returns according to percentage of
ownership of share. The owners of such sukuk are the rabal-mal (capital provider).
(2 marks)

Musharakahsukuk

These are investments in sukuk that represent ownership of musharakah equity. It does not
differ from the mudarabah sukuk except in the organization of the relationship between the
parties issuing sukuk forms a committee from the holders of the sukuk who can be referred to in
investment decisions.
(2 marks)
Ijarah sukuk

These are sukuk that represent ownership of equal shares in a rented real estate or the usufruct
(benefit) of the real estate. These sukuk give their owners the right to own the real estate,
receive the rent and dispose of their sukuk in a manner that does not affect the right of the
lessee, i.e. they are tradable. The holders of such sukuk bear all cost of maintenance of and
damage of the real estate.
(2 marks)
Salam or Istisna’ sukuk

These are sukuk that represent a sale of a commodity on the basis of deferred delivery against
immediate payment. The deferred commodity is a debt in-kind against the supplier because it
refers to a commodity which is accepted based on the description of the seller. The Istisna’
sukuk is similar to Salam sukuk, except it is permissible to defer payment in an istisna’
transaction, but not in a salam.
(2 marks)
(any 2 @ 2 marks each = 4 marks)

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b. Journal entries

1/3/2008 Dr. Investment in Securities account√ (2.00 1,800,000 √√

x 900k)
Cr. Cash account 1,800,000
(Being investment in Company A shares)
31/12/2014: Dr. Profit or Loss account – unrealised loss√ 270,000√√
(0.30 x900k)
Cr. Investment in Securities account √ 270,000
(Recognition of unrealised loss in Company
A shares)

Dr. Investment Fair Value Reserve account√ 270,000√

Cr. Profit or Loss account – appropriation √ 270,000
(Transfer investment unrealised loss to
reserve)

(10√ x 1 = 10 marks)

(Total: 14 marks)

QUESTION 3

a)

ISLAMIC DEPOSIT CONVENTIONAL DEPOSIT

The principal amount is fully generated (except
for mudharabah)√
There is no presence of interest. However, the
depositors maybe offered hibah (gift)√
The bank cannot offer any incentives in the
form of gifts when it is structured based on
qard or wadiah√
The deposit is accepted on th condition that
the money will be put to work together with the
management expertise and skills of the bank√
Both the principal and interest are
predetermined and guaranteed√
Interest is fixed at a predetermined rate but is
subject to revision√
The bank can offer incentives to attract new
depositors√
The deposit is a form of debt given to the bank
by the customer√

Any three is acceptable (6√ x 1 mark = 6 marks)

b) Journal entries

Dr. Cash 220,000√

Cr. Mudarabah deposit√ 220,000
Receives fund from Rabbul Mal

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Dr. Mudarabah deposit√ 220,000√

Cr. Cash 220,000
Bank pays/repays the customers’ account

Dr. Profit and loss (0.8 X 100,000 X0.6)√ 48,000√√√

Cr. Cash 48,000
Bank distributes profit

Accept any 11 ticks (8√ X 1 = 8 marks)

(Total: 14 marks)

QUESTION 4

a) The main duties and responsibilities of the Shariah Committee are as follows:

1. Responsibility and accountability

The Shariah Committee is expected to understand that in the course of discharging the duties
and responsibilities as a Shariah Committee member, they are responsible and accountable for
all Shariah decisions, opinions and views provided by them.

2. Advise to the board and IFI

The Shariah Committee is expected to advise the board and provide input to the IFI on Shariah
matters in order for the IFI to comply with Shariahprinciples at all times.

3. Endorse Shariah policies and procedures

The Shariah Committee is expected to endorse Shariah policies and procedures prepared by
the IFI and to ensure that the contents do not contain any elements which are not in line with
Shariah.

4. Endorse and validate relevant documentations

To ensure that the products of the IFI comply with Shariah principles, the Shariah Committee
must approve:i) the terms and conditions contained in the forms, contracts, agreements or other
legal documentations used in executing the transactions; and ii) the product manual, marketing
advertisements, sales illustrations and brochures used to describe the product.

5. Assess work carried out by Shariah review and Shariah audit

To assess the work carried out by Shariah review and Shariah audit in order to ensure
compliance with Shariah matters which forms part of their duties in providing their assessment
of Shariah compliance and assurance information in the annual report.

6. Assist related parties on Shariah matters

The related parties of the IFI such as its legal counsel, auditor or consultant may seek advice on
Shariah matters from the Shariah Committee and the Shariah Committee is expected to provide
the necessary assistance to the requesting party.

7. Advise on matters to be referred to the SAC

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The Shariah Committee may advise the IFI to consult the SAC on Shariahmatters that could not
be resolved.

8. Provide written Shariah opinions

The Shariah Committee is required to provide written Shariah opinions in circumstances where
the IFI make reference to the SAC for further deliberation, or where the IFI submits applications
to the Bank for new product approval
( 2 marks for each point and elaboration x any 5 = 10 marks)

b) Shariah risk management is a function to systematically identify, measure, monitor and

control of Shariah non-compliance risks to mitigate any possible of non-compliance
events.
(1 marks)

Among the function of Shariah risk management:

1. Facilitating the process of identifying, measuring, controlling and monitoring Shariah

non-compliance risks inherent in the IFI’s operations and activities.√

2. Identifying and understanding the inherent Shariah non-compliance risks in the IFI√

3. Measuring the potential impact of such risks to the IFI, based on the historical and actual
de-recognition of income derived from Shariah non-compliant activities√

4. Monitoring of Shariah non-compliance risks to facilitate efficient and effective

management of such risks. √

5. Controls to avoid recurrences by keeping track of income not recognised arising from
Shariah non-compliant activities and assessing the probability of similar cases arising in
the future.√
(Any 3√ x 1 = 3 marks)
(Total: 14 marks)

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QUESTION 5
a) The differences between the role of Shariah committee report and independent auditor
report are:

SHARIAH COMMITTEE INDEPENDENT AUDITOR REPORT

REPORT

PURPOSE/INTRO  Review principles & contracts  Audit the FS & express an opinion
in relation to transaction & on the FS based on the audit. √
application used by IFI for an
opinion whether the IFI have
complied with shariah
principles, ruling issued by
SAC of BNM &Shariah
committee decision. √

SCOPE OF  ShC members assess the  Plan & perform audit to obtain
WORK work carried out by shariah reasonable assurance about
PERFORMED review &shariah audit that whether FS are free from any mat.
include examining on test
Mist.
basis each type of transaction,
relevant documentation &
 Examine on test basis evidence
procedures adopted by IFI.
used to support the amounts &
 Plan & perform review in order
to obtain all in4 & explanation disclosure in FS.
for evidence. √
 Assess accounting principles used

 Evaluate all FS presentation √

OPINION  Provide opinion whether items  Provide opinion whether FS has

that have been reviewed are in
compliance with shariah
principles
 E.g of items reviewed:
 Contract & transaction
 Calculation of zakat√
been prepared in accordance with
CA 1965, BNM Guidelines & AAS
to give true & fair view.
 The state of affairs of the bank
 Accounting & other records
required by CA 1965 √

(6√ x 1 = 6 marks)

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b) Materiality indicator used by Shariah committee:

1. Major non shariah compliance √

 Comprise of risk that may lead to invalidation of the contract / unrecognized of profit e.g :
The contract must be free from any riba, gharar, maisir& other prohibited activities √

2. Moderate non shariah compliance √

 Comprised of non-compliance of conditions of contract. e.g : Specification of subject

matter is not fulfilled √

3. Minor non shariah compliance√

 Comprised of other than the above √
(6√ x1 = 6 marks)

c) The concept of accountability applied in Shariah audit :

 Man is accountable to Allah for what he has earned. Whatever misappropriation
therefore will be questioned by Allah in the Doomsday√
 It is the demand of this natural lust for wealth and material that human beings should be
repeatedly reminded not to forget that they are “trustees” and that any violation in what
they have been entrusted with might result in unpleasant consequences for them.√
(2√ X 1 = 2 marks)
(Total: 14 marks)

PART B

QUESTION 1

a) Bank and customer contribute capital

Contract based on profit sharing ratio
Need to share the profit or loss throughout the period
Customer will gradually increase his share of ownership by buying the bank’s share.
Bank’s share gets reduced until it becomes zero.
The installments include an amount for the purchase of the bank share and the balance
constitutes rental payment
Outstanding repayment will be categorized as receivable
(Any 3 x 1 mark = 3 marks)

b) Total capital = RM500,000/20 x 100 = RM 2.5 million√√

(2√ x 1 = 2 marks)

c) Working

Year PSR/CC Bank’s iTrade’s Capital Profit/(Loss) Profit/(Loss) Profit/(Loss)

capital capital Repayment Bank iTrade

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1 20:80 500 2,000 125 200 40 160

2 15:85√ 375√ 2,125 125 (180) (27) (153)
3 10:90√ 250√ 2,250 125 250 25 225
4 5:95√ 125√ 2,375 125 (60) (3) (57)

Journal entries

2012 Dr MusharakahMutanaqisahFinancing ac√ 500,000√

Cr Cash ac √ 500,000
(Musharakah financing for the customer)

Dr Cash ac√ 125,000√

Cr MusharakahMutanaqisahFinancing 125,000
(Repayment by the customer)

Dr Cash ac√ 40,000√

Cr Profit or Loss ac√
40,000
(Profit received from
MusharakahFinancing)
2013 Dr Cash ac (60% x 125,000) √ 75,000 √
Dr Profit or Loss account √ 27,000√√
Dr Receivable account √ 23,000√
Cr MusharakahMutanaqisahFinancing 125,000
account
(60% of the agreed repayment amount
paid by the customer and loss recognition
for 2013)
2014 Dr Cash ac [125,000+11,500]√ 136,500√√
Cr MusharakahMutanaqisahFinancing ac √ 125,000 √
Cr Receivable ac 11,500√
(Repayment by the customer for 2014 and
half of the amount outstanding in 2013)

Dr Cash ac √ 25,000 √√
Cr Profit or Loss ac√ 25,000
(Profit sharing 2014)

2015 Dr Cash ac√ 125,000√

Cr MusharakahMutanaqisahFinancing ac√ 125,000
(Repayment amount paid by the customer
with outstanding amount RM35,000& loss
recognition for 2015)

Dr Profit or Loss acc √ 3,000 √√

Cr MusharakahMutanaqisahFinancing ac√ 3,000
(Loss for 2015)

Dr Cash ac√ 11,500√

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Cr Receivable ac√ 11,500

(Repayment by the customer for half of the
amount outstanding in 2013)

√38 x 0.5 = 19 marks

d) An Extract of Statement of Profit and Loss and Comprehensive Income for the year
ended
2012 2013 2014 2015
Income from 40000√ (27000) √ 25000√ (3000) √
financing√

An Extract of Statement of Financial Position

2012 2013 2014 2015

Musharakah 375000√ 250000√ 125000√ 0√
Mutanaqisah√

Receivable 23000√ 11500√ 0

√12 x 0.5 mark = 6 marks

(Total: 30 marks)
END OF SOLUTION

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