Financial Reporting for Islamic Banking Institutions

The Malaysian Financial Reporting Standards (MFRS) which serve as a basis for financial reporting in Malaysia have been fully converged with the International Financial Reporting Standards (IFRS) from 1 January 2012. Ongoing improvements of these standards have contributed to a greater alignment between financial reporting and prudential frameworks. Notwithstanding these positive developments, the increasingly more principle-based financial reporting standards and the substantial degree of judgment required under the financial reporting standards can continue to result in divergent outcomes between the objectives of financial reporting and prudential regulation, which is primarily concerned with promoting financial stability.

Recognising this potential dichotomy, an Islamic financial institution is required under the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA) to prepare its financial statements in accordance with the MFRS, subject to any standards as may be specified by the Bank to reflect specific modifications or exceptions to the MFRS. The Bank envisages that such modification or exceptions will only become necessary in circumstances where alternative prudential measures would not be adequate to promote the financial resilience of the Islamic financial institution or address threats to financial stability. Where such modifications or exceptions are specified by the Bank, this must be accompanied by a disclosure of that fact by the Islamic financial institution.

This policy document clarifies and sets minimum expectations for the application of the MFRS to an Islamic financial institution. It also aims to ensure adequate disclosures by an Islamic financial institution in the financial statements to improve comparability for users of financial statements and better facilitate the assessment of an Islamic financial institution’s financial position, performance and Shariah compliance.

This policy document sets out—
(a) the specific requirements on the application of the MFRS;
(b) information to be disclosed in the financial statements including those arising from the Shariah contracts applied in Islamic banking transactions;
(c) application requirements for approval of a dividend payment; and
(d) requirements on submission and publication of the financial statements.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking