Chapter in Book

This hypothetical case study was developed based on the financial statements of Bahrain Islamic Bank and Bank Islam Malaysia Berhad. The banks were registered in two different countries namely Bahrain and Malaysia that adopted Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and International Financial Reporting Standards (IFRS) (the standards are locally adopted and named as Malaysian Financial Reporting Standards (MFRS)) issued by International Accounting Standards Board (IASB) respectively. The key issues explored in this case are: the motivation for recording and reporting Islamic financial transactions; types and purposes of financial statements prepared by Islamic financial institutions (IFIS) in the two different financial reporting regimes; Shari'ah perspectives of key accounting assumptions such as substance over form, time value of money, fair value and principles of probability. Understanding the Shari'ah perspective of key accounting assumptions would help preparers and users of financial statements to appreciate the effect of accounting policy adopted for financial reporting.

This case was developed based on a real-life experience dealing with an Islamic car financing contract (i.e. Al-ljarah Thumma Al-Bay |AITAB] contract - Sale and Leaseback) between a Malaysian Islamic Financial Institution and their customer. It is well recognised that AITAB is governed by the Malaysian Hire Purchase Act 1967, that oversees conventional (nor Islamic) car financing, yet it is used for both financing modes. The contract requires clarification on the following: understanding of the nature of the contract used and the relevant transactions involved; revenue recognition (current and future); capitalisation of relevant costs in the asset's value; fair value of leased asset; recognition of financial assets and liabilities; and disclosure requirements from the bank and customer perspectives. Users of the case are assumed to be familiar with the various regulatory requirements and theoretical foundation of the "Accounting for Islamic Financial Transactions" from IFRS/MFRS (International Financial Reporting Standards/Malaysian Financial Reporting Standards) and the AAOFI (Accounting and Auditing Organization for Islamic Financial Institutions) reporting perspectives.