Advanced CIFE in Islamic Accounting Recap: Module VII And VIII · Advanced CIFE™in Islamic Accounting Live Session 4 © Ethica Institute Of Islamic Finance 2 Accounting for Salam

Advanced CIFE™ in Islamic AccountingLive Session 4

© Ethica Institute Of Islamic Finance 1

Advanced CIFE™in Islamic AccountingLive Session IV

Recap: Module VII And VIII

• Accounting for Salam

• Reporting in Salam

• Measurement of Salam commodity value

• Recognition of delivery in Parallel Salam

• Accounting for Istisna

• Islamic bank as manufacturer

• Islamic bank as purchase orderer

• Accounting for provisions

• Accounting for reserves

• Accounting for Salam

• Reporting in Salam

• Measurement of Salam commodity value

• Recognition of delivery in Parallel Salam

• Accounting for Istisna

• Islamic bank as manufacturer

• Islamic bank as purchase orderer

• Accounting for provisions

• Accounting for reserves



Accounting for Salam


• How Salam works:

• Step 1: The client approaches the Islamic bank, and sellsthe commodity under Salam. The bank, as purchaser, paysthe purchase price to client

• Step 2: The Islamic bank finds a purchaser for thecommodity, and sells the same commodity under anotherSalam (Parallel Salam). The bank, as seller, receives thesale price from the buyer

• Step 3: The client delivers the commodity on the agreeddate

• Step 4: The bank delivers the commodity to the 3rd partybuyer

• How Salam works:

• Step 1: The client approaches the Islamic bank, and sellsthe commodity under Salam. The bank, as purchaser, paysthe purchase price to client

• Step 2: The Islamic bank finds a purchaser for thecommodity, and sells the same commodity under anotherSalam (Parallel Salam). The bank, as seller, receives thesale price from the buyer

• Step 3: The client delivers the commodity on the agreeddate

• Step 4: The bank delivers the commodity to the 3rd partybuyer





• Salam financing recognized when payment made toclient

• Accounting entry

• Parallel Salam recognized when payment received from3rd party


• Salam financing recognized when payment made toclient


• Parallel Salam recognized when payment received from3rd party


Dr. Cash xxx

Cr. Parallel Salam xxx

Dr. Salam financing xxx

Cr. Customer account xxx




• In case of default in delivering the Salam commodity


• In case goods need to be bought from the market to bedelivered to Parallel Salam buyer


• In case of default in delivering the Salam commodity


• In case goods need to be bought from the market to bedelivered to Parallel Salam buyer


Dr. Commodity xxx

Cr. Cash xxx

Dr. Provision xxx

Cr. Salam financing xxx


• Delivery of Salam commodity by buyer


• Delivery by bank to purchaser under Parallel Salam


• Delivery of Salam commodity by buyer


• Delivery by bank to purchaser under Parallel Salam


Dr. Parallel Salam xxx

Cr. Commodity xxx

Cr. Profit xxx

Dr. Commodity xxx

Cr. Salam financing xxx



Accounting for Istisna


• How Istisna works with the Islamic bank as manufacturer:

• Step 1: The client approaches the Islamic bank tomanufacture a certain commodity. The bank agrees to buythat commodity when it is manufactured, and pays thepurchase price

• Step 2: Upon completion of manufacturing, the Islamic banktakes possession of the commodity

• Step 3: The bank or its agent sells the commodity in themarket, and receives the sale price. In case the bank hadentered into a Parallel Istisna, the commodity is delivered tothe third party

• How Istisna works with the Islamic bank as manufacturer:

• Step 1: The client approaches the Islamic bank tomanufacture a certain commodity. The bank agrees to buythat commodity when it is manufactured, and pays thepurchase price

• Step 2: Upon completion of manufacturing, the Islamic banktakes possession of the commodity

• Step 3: The bank or its agent sells the commodity in themarket, and receives the sale price. In case the bank hadentered into a Parallel Istisna, the commodity is delivered tothe third party





• Istisna financing (or Istisna costs) are recorded as an asset.This is also known as the Istisna work in progress account

• Amount billed under Parallel Istisna is recorded as an asset.This is a mirror of the Istisna financing account

• Istisna financing (or Istisna costs) are recorded as an asset.This is also known as the Istisna work in progress account

• Amount billed under Parallel Istisna is recorded as an asset.This is a mirror of the Istisna financing account

Dr. Parallel Istisna receivable xxx

Cr. Istisna billing xxx

Dr. Istisna financing xxx





• Once the asset is manufactured and delivered, thefinancing account is reversed and asset is booked

• The asset is then delivered to the buyer under ParallelIstisna, and profit on transaction is recognized

• Once the asset is manufactured and delivered, thefinancing account is reversed and asset is booked

• The asset is then delivered to the buyer under ParallelIstisna, and profit on transaction is recognized

Dr. Istisna billings xxx

Cr. Istisna asset xxx

Cr. Profit xxx

Dr. Istisna asset xxx

Cr. Istisna financing xxx


• Once the payment is received from the buyer underParallel Istisna, the receivable is reversed

• Once the payment is received from the buyer underParallel Istisna, the receivable is reversed

Dr. Cash xxx

Cr. Parallel Istisna receivable xxx



Accounting for Provisions and Reserves

Accounting for Provisions

• Provisions indicate an impairment in an asset’s value

• Specific provision: Made against a specified asset


• General provisions: Estimated amount needed to cover apotential loss that may occur


• Provisions indicate an impairment in an asset’s value

• Specific provision: Made against a specified asset


• General provisions: Estimated amount needed to cover apotential loss that may occur


Dr. Bad and doubtful debts xxx

Cr. Provision – XYZ asset xxx

Dr. General provision expense xxx

Cr. Provision – XYZ class of assets xxx







Accounting for Reserves

• Reserve is an appropriation of income

• Profit equalization reserve: amount deducted fromMudarabah income before apportioning working partner’sshare

• Investment risk reserve: amount deducted fromMudarabah income after allocating working partner’sshare

• PER is used to maintain a consistent percentage ofincome, to minimize volatility

• IRR is used to cover losses

• Reserve is an appropriation of income

• Profit equalization reserve: amount deducted fromMudarabah income before apportioning working partner’sshare

• Investment risk reserve: amount deducted fromMudarabah income after allocating working partner’sshare

• PER is used to maintain a consistent percentage ofincome, to minimize volatility

• IRR is used to cover losses

Q&A



Q&A

How is the Salam commodity presented at recognitionand at end of financial period?How is the Salam commodity presented at recognitionand at end of financial period?

Q&A

In Istisna, why are administrative expenses and R&Dcosts not included in the cost of the asset?In Istisna, why are administrative expenses and R&Dcosts not included in the cost of the asset?



Q&A

What is the difference between the percentage completionmethod and the project completion method?What is the difference between the percentage completionmethod and the project completion method?

Q&A

What are the accounting entries when Istisna order ischanged?What are the accounting entries when Istisna order ischanged?

Dr. Parallel Istisna receivable xxx

Cr. Istisna billing xxx

Dr. Istisna financing xxx




Thank You

Documents

Advanced CIFE in Islamic Accounting Recap: Module VII And VIII · Advanced CIFE™in Islamic Accounting Live Session 4 © Ethica Institute Of Islamic Finance 2 Accounting for Salam