CHAPTER 11ACCOUNTING ISSUES ON SALAM AND PARALLEL SALAM FINANCING*

Definition of Salam & Parallel SalamIllustration of Salam ContractsComparative Contractual AnalysisAccounting Treatment for Salam Financing

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*Purchase of a commodity for deferred delivery in exchange for immediate payment according to specified conditions or,

Sale of a commodity for deferred delivery in exchange for immediate payment.

Al Muslam Fihi : The commodity to be delivered Al Muslam Ileihi : The seller Al Muslam : The purchaser Ras-almal : Price of commodity in cash, kind or benefit

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*Legality of Salam O you who believe! When you deal with each other in transactions involving future obligations in a fixed period of time, put them in writing (Al-Baqarah:282)Whoever participates in a forward sale, let him buy a known volume, or known weight for a known term of deferment (Hadith)

*Conditions of SalamPrice must be paid in full at spotDeferment of payment will entail sale of debt for debt (bay al-kali bil kali)Purpose of salam is to fulfill financing need of sellerImam Malik allows seller to voluntarily give concession of 2 or 3 days to make paymentSalam commodity must be capable of being specified exactly in quantity and qualitySalam is concluded over fungible goods that are readily available in the locality. Hence, Salam cannot be for a specific commodity with specified origin E.g. product of a particular farm or field

*Conditions of Salamfungible describes commodities that can be traded or substituted for an equal amount of a like commodity, usually to satisfy a contract

*Conditions of SalamThe following must be unambiguously and fully specified and agreed uponQuality and quantity of commodityExact date, place and mode of deliverySalam cannot be applied to ribawi items which must be exchanged at spotE.g. exchange of gold and silver

*A Salam contract whereby al muslam ileihi (seller) depends, for executing his obligation, on receiving what is due to him in his capacity as a muslam (purchaser) from a sale in a previous Salam contract.Buys and sells on Salam contracts

*IMPORTERIFIEXPORTERAl Muslam Ileihi(Seller)Al Muslam Ileihi(Seller)Al Muslam(Purchaser) Al Muslam (Purchaser) 12

Where is the Parallel Salam?

A enters into Salam contract with B, a joint stock company. B has a subsidiary C, who is a separate legal entity but is fully owned by B. Is it possible for A to enter into Parallel Salam with C??*

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SpotContractForwardContractMurabaha(Deferred)SalamContractPaymentImmediateDeferredDeferredImmediateDeliveryImmediateDeferredImmediateDeferred

Quality mismatch and substitutions of goods

Delayed or Earlier delivery of goods

Sale of muslam fihi prior to receipt

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*Salam Financing transaction shall be presented as assets in the financial statement as Salam Financing

Salam Deposits from Customers based on parallel Salam transactions are presented as Parallel Salam

*Recognise Salam financing capital when it is paid or made available (as a facility)

Parallel Salam transaction is recognized when the Islamic bank receives the capital of Salam (cash, kind or benefit)

*Measurement of capital at time of contract is by amount paid or fair value of capital in kind or benefit.

Measurement of capital at end of financial period is similar to at time of contract. However if a decline in value of muslam fihi (commodity) is anticipated, a provision for the estimated deficit is made (due to non delivery in full or part of muslam fihi).

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Received in accordance to contract?

Asset reported at historical cost

Received in different quality or substitute at lower quality

Asset reported at lower of cost or market value Delayed but extended delivery date Asset reported at historical cost Cancelled Salam contract Asset to be reported as receivable