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Proposed impairment model might pose problems in Islamic accounting

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12 Jul 2013

In an appendix to the general comment letter of the Asian-Oceanian Standard Setters Group (AOSSG), the AOSSG Islamic Finance Working Group points at problems that the IASB's proposed new impairment model might pose in the contetxt of Mudarabah / Musharakah profit distribution.

Under Mudarabah or Musharakah contracts custumors are deemed to have ‘invested’ in the financing activities of a bank. Returns on these investment must be based on ‘actual’ profit or loss from the relevant financing assets. This means they are income or deductions rather than interest as taking interest is prohibited in Sharia'a compliant finance transactions.

The current model of incurred losses usually meant that there was an event of default that could be construed to be the ‘actual loss’ required. The new impairment model suggested by the IASB is however based on expected credit losses so it seems rather difficult to construe the ‘actual loss’ which could be the basis for an allowed deduction for Mudarabah / Musharakah profit distribution.

Please click for more information in the comment letter from the AOSSG Islamic Finance Working Group which is attached as Appendix A to the general comment letter on the AOSSG website.

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