AOSSG points out specific aspects of Islamic financial reporting in connection with the Conceptual Framework
09 Dec, 2015
In an appendix to the general comment letter of the Asian-Oceanian Standard-Setters Group (AOSSG) on the IASB's exposure draft ED/2015/3 'Conceptual Framework for Financial Reporting' the AOSSG's Islamic Finance Working Group (IF WG) points out some specific aspects relevant to Islamic accounting.
The IF WG especially welcomes the explicit 'substance over form' statement in the proposed Conceptual Framework as stakeholders in Islamic finance place high importance on the legal form(s) used to achieve a particular economic phenomenon (the legal form determines whether a transaction is permissible or prohibited). Nevertheless, given the importance of the underlying contracts in determining the permissibility of an Islamic financial transaction, the IF WG considers it appropriate to disclose information in the financial statements about the legal form of an economic phenomenon as part of the faithful representation of that phenomenon.
The comment letter also notes that the ED’s discussion on the reporting entity and the boundary of the reporting entity may be useful to current discussions on Islamic arrangements, where an entity is responsible for the economic activities of another non-legal entity, where it is important to comply with both the shariah assertion of separate entities and the IFRS requirement for consolidated financial statements, or where the presentation of related financial statements may be necessary to provide relevant and faithful representative information even in instances where control is not present.
On liability and equity the comment letter notes that the ED seems to focus more on the legal aspect in determining whether or not an entity has a present obligation to transfer economic resource while in the context of Islamic finance the concept of constructive obligations is of great importance as entities are often much more bound by societal expectations than by legal obligations. The IF WG suggests to retain the current definition of liability until the project on financial instruments with characteristics of equity has been completed and the definition of equity and its relation to liabilities is clear as the underlying principle that differentiates liability and equity is important in the context of Islamic finance products that contain elements of liability and equity such as Islamic bonds and profit-sharing accounts.
Please click to access the full letter of the IF WG on the AOSSG website.
