The Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”) had on 4 May 2021 issued a new financial accounting standard – FAS 37 Financial Reporting by Waqf Institutions.
AAOIFI is a not-for-profit organisation established in 1991 in Bahrain. AAOIFI issues standards in the areas of Shari’ah, accounting, auditing, ethics and governance for Islamic finance. The founding members of AAOIFI are:
- Al-Baraka Banking Group (Bahrain)
- Al-Bukhary Foundations (Malaysia)
- Al-Rajhi Bank (Kingdom of Saudi Arabia)
- Dar Al-Maal Al Islami Trust (Bahrain)
- Islamic Development Bank (Kingdom of Saudi Arabia)
- Kuwait Finance House (Kuwait).
Financial reporting for Waqf in Malaysia
In Malaysia, entities generally do not apply or adopt the AAOIFI framework for financial reporting purposes. Instead, we apply either the Malaysian Financial Reporting Standards (“MFRS”), the Malaysian Private Entities Reporting Standard (“MPERS”) or the Malaysian Public Sector Accounting Standards (“MPSAS”). We have explained in great length these frameworks in Financial Reporting Frameworks in Malaysia. Head out to this article if you wish to understand more.
Nevertheless, none of the three frameworks has any specific standard relating to the financial reporting for Waqf institutions. Waqf is generally under the purview of the State Islamic Religious Council (“SIRCs”). These SIRCs apply MPSAS as the framework for financial reporting purposes. Although there is an initiative from the Accountant General Department of Malaysia to come out with the framework for Waqf, Baitulmal and Zakat institutions, the effort is still very much underway.
Having said this, we are interested to share with readers what are the financial reporting requirements under FAS 37 for Waqf institutions as issued by AAOIFI.
The financial reporting requirements under FAS 37
AAOIFI started Waqf project back in 2016. FAS 37 Financial Reporting by Waqf Institutions is the final output of AAOIFI’s Waqf Project. The project promotes the transparency and accountability of the institutions. Additionally, the standard aims to contribute towards improving the effectiveness and efficiency of operations, maximising the benefits to beneficiaries, ensure proper accountability and sustainability while maintaining the Waqf corpus.
Here, we summarise the key financial reporting requirements for waqf institutions under FAS 37.
#1: The recognition
In Waqf structure, some of the assets comprising of Waqf corpus. Waqf corpus is the business or asset(s) that has been designated as the corpus of Waqf by the Waqif and are required to be sustained. Waqif is the principal donor of Waqf who establishes a Waqf and allocates an asset that he owns to the Waqf.
FAS 37 explains that the Waqf corpus includes all types of individual assets, businesses and contributions to the Waqf equity as defined by the Waqif as the corpus of Waqf.
Waqif may also contribute Waqf corpus in the form of specified assets or contribution to the Waqf equity (cash or in-kind assets). If the contribution is a specified asset, the same comprises of the Waqf corpus. For cash contribution or contribution in-kind assets, the Waqf corpus is their cash equivalents.
Contribution by Waqif or other which are not specifically defined by Waqf corpus, must not be considered as the Waqf corpus.
#2: The initial measurement
For initial recognition and measurement, Waqf institutions initially measure the assets comprising of the Waqf corpus at fair value. At the same time, it recognises the corresponding amount as Waqf equity. However, if the assets comprising of the Waqf corpus are not expected to generate economic benefits, Waqf institutions recognise and measure them at nominal value.
Waqf institutions recognise all other assets and liabilities based on their accounting policies as per the applicable AAOIFI standards.
#3: The subsequent measurement
For subsequent measurement of assets comprising of the Waqf corpus (except for cash contribution or contribution in-kind assets), entities measure them at fair value with corresponding fair value gains or losses recognised directly in Waqf equity. Entities do not need to charge depreciation or amortisation for such assets.
Additionally, Waqf institutions must review the fair value at the end of each reporting period. Waqf institutions re-measure the assets when there is an indication of significant changes since previous valuations. Besides that, Waqf institutions recognise income arising from assets comprising of the Waqf corpus (other than the fair value gains or losses) in the statement of financial activities.
Assets comprising of the Waqf corpus which are not expected to generate economic benefits continue to be carried at their original nominal value. If possible, a disclosure of estimated fair value or replacement cost may be useful for the understanding of the users of the financial statements.
For all other assets and liabilities, Waqf institutions measure them as per their accounting policies, in line with the requirements of AAOIFI.
#4: The recognition of income and expense
Waqf institutions recognise income according to the accounting policies as per the requirements of relevant AAOIFI standards. Additionally, expenses recognised for the period must include:
- Expenses necessary to be incurred to earn income, including direct expenses related to the maintenance and administration of the Waqf corpus; and
- Governance and management expenses of the Waqf.
FAS 37 also requires Waqf institutions to account for the utilisation of Ghallah as an appropriation from equity. Ghallah or yield represents the net surplus from financial activities and other gains or losses attributable to the beneficiaries.
#5: Selection of accounting policies
FAS 37 further explains that in developing accounting policies, Waqf institutions must follow the following hierarchy:
- Firstly – based on FAS that specifically addressing the transactions, other events or conditions or other pronouncement issued by AAOIFI.
- Secondly – based on FAS on similar matters.
- Thirdly – based on generally accepted accounting principles as applied in the respective jurisdictions so long they are not against the conceptual framework and Shariah principles and rules.
- Lastly – based on the management’s judgement so long it is not against the conceptual framework and Shariah principles and rules.
#6: General presentation of financial statements
Waqf institutions must include a statement of compliance to AAOIFI if it is followed in their entirety in the preparation of financial statements. Additionally, Waqf institutions must prepare a complete set of financial statements which consist of the following:
- Statement of financial position
- Statement of financial activities for the period
- Statement of Ghallah for the period
- Statement of changes in Waqf equity for the period
- Statement of cash flows for the period
- Notes to the financial statements.
Waqf institutions present assets, liabilities and Waqf equity according to the nature of operations. Additionally, it must also distinguish between assets comprising of the Waqf corpus and other assets.
The objective for the statement of Ghallah is to inform users of the following:
- The determination of Ghallah in line with the conditions of the Waqif or as essential for the achievement of Waqf objectives
- The benefits allocated or distributed out of the Gallah amount available for distribution and
- Balance available of inappropriate Gallah as of the beginning and the end of the period. This amount is part of Waqf equity.
Sustainability of Waqf equity
FAS 37 also additionally requires Waqf institutions to disclose Waqf equity sustainability. Such disclosure explains the Waqf institutions’ objectives and policies for managing risks. Additionally, it must also disclose the reasons and consequences if it has not complied with the sustainability requirements.
Reporting of service performance of Waqf institutions
FAS 37 also requires Waqf institutions to disclose the statement of service performance in the notes to the financial statements. The statement provides non-financial information for users to understand the operational performance of the Waqf institution in correlation to its financial activities and state of affairs.
The service performance reporting consists of two elements:
- Outcome(s) – which is the impact of the Waqf institution on society in accordance with provisions of Waqf deed; and
- Output(s) – which is goods, benefits, grants, distributions or services that the Waqf institution delivered during the period.
The detailed FAS 37 is available on AAOIFI’s website for reference.