AAOIFI Financial Accounting Standard No. (3) Mudarabah Financing @ Glance
Introduction to Mudarabah Financing
FAS 3 covers accounting rules for recognizing, measuring and disclosing the transactions of Mudarabah financing that are carried out by Islamic banks and financial institutions. It is developed based on juristic principles and highlights the various accounting principles and treatments of Mudarabah financing. The standard covers end-to-end financial transaction from the inception to the competition and Mudarabah contract by the Islamic bank as a Mudarib (capital provider).
Out of Scope
FAS 3 does not address the following Islamic contractual agreements:
- The accounting treatment of Mudarabah transactions in the Mudarib (client) books as well as the Mudarabah books.
- The Islamic bank’s receipt of unrestricted investment accounts funds which are characterized as Mudarabah from a Shari’a perspective.
- The Islamic bank’s receipt of restricted investment account funds whether within its capacity as Mudarib or agent.
- Zakah of Mudarabah fund.
Measurement of Mudarabah Capital at the Time of Contracting
- Mudarabah capital provided in cash by the Islamic bank shall be measured by the amount paid or the amount placed under the disposition of the mudarib.
- Mudarabah capital provided by the Islamic bank in kind (trading assets or non-monetary assets for use in the venture) shall be measured at the fair value of the assets (the value agreed upon between the Islamic bank and the client), and if the valuation of the assets results in a difference between fair value and book value, such difference shall be recognized as profit or loss to the Islamic bank itself.
- Expenses of the contracting procedures incurred by one or both parties (e.g., expenses of feasibility studies and other similar expenses) shall not be considered as part of the Mudarabah capital unless otherwise agreed by both parties.
Measurement of Mudarabah Capital After Contracting at the end of a Financial Period
- Mudarabah capital shall be measured at the time of contracting. However, any repayment of the Mudarabah capital, if any, made to the Islamic bank shall be deducted from the Mudarabah capital.
- If a portion of the Mudarabah capital is lost prior to the inception of work because of damage or other causes without any misconduct or negligence on the part of the Mudarib, such loss shall be deducted from the Mudarabah capital and shall be treated as a loss to the Islamic bank. However, if the loss occurs after inception of work, it shall not affect the measurement of Mudarabah capital.
- If the whole Mudarabah capital is lost without any misconduct or negligence on the part of the Mudarib, the Mudarabah shall be terminated and the account thereof shall be settled and the loss shall be treated as a loss to the Islamic bank.
- If the Mudarabah is terminated or liquidated and the Mudarabah capital (taking account of any profits or losses) is not paid to the Islamic bank when a settlement of account is made, the Mudarabah capital (taking account of any profits or losses) shall be recognized as a receivable due from the Mudarib.
Recognition of the Islamic Bank’s Share in Mudarabah Profits or Losses
- Profits or losses in respect of the Islamic bank’s share in Mudarabah financing transactions that commence and end during a single financial period shall be recognized at the time of liquidation.
- In the case of Mudarabah financing that continues for more than one financial period, the Islamic bank’s share of profits for any period, resulting from partial or final settlement between the Islamic bank and the Mudarib, shall be recongized in its accounts for that period to the extent that the profits are being distributed; the Islamic bank’s share of losses for any period shall be recognized in its account for that period to the extent that such losses are being deducted from the Mudarabah capital.
- If the Mudarib does not pay the Islamic bank its due share of profits after liquidation or settlement of account is made, the due share of profits shall be recognized as a receivable due from the Mudarib.
- Losses resulting from liquidation shall be recognized at the time of liquidation by reducing the Mudarabah capital.
- The Mudarib shall bear the losses incurred due to misconduct or negligence on his part. Such loss shall be recognized as a receivable due from the Mudarib
- Disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for decline in the value of Mudarabah assets.
- The disclosure requirements stated in Financial Accounting Standard No. (1)