Professional Documents
Culture Documents
Shabnam Mokthar
Applying IFRS Denitions to Shariah Compliant Derivatives Applying IFRS Recognition Principles to Shariah Compliant Derivatives Applying AAOIFI Standards to Shariah Compliant Derivatives Accounting Issues for Embedded Derivatives & Other Products Prospective Derivative Guidance under IFRS
Course Objectives
This is a new, specialized training program that will examine the use, application and structure of Islamic derivative instruments in detail, with specic focus on accounting and nancial reporting issues. The course will be lecture based but will feature worked real-life examples, group exercises and discussions in order to demonstrate specic products or accounting principles. The aims of the course, among others, are as follows: To familiarize delegates with the structure and application of various Islamic derivatives and to explore the Shariah limitations of these products To dene derivatives under existing IFRS and to apply the IFRS denition to Shariah compliant derivatives To examine AAOIFI standards applicable for Shariah compliant derivatives and their application To understand the application of IFRS recognition principles to Shariah compliant derivatives To examine hedge accounting, fair value measurement and to understand the issues regarding embedded derivatives under Shariah compliant nance To discuss and understand prospective derivative guidance under IFRS (IFRS9 which replaces IAS 39)
Group discussion: How is a Shariah compliant forward dierent from a conventional forward?
Prot Rate Swap (PRS) Shariah issues in Interest Rate Swap (IRS) Prot Rate Swap Structures: o Two Tawarruq on each trade date (Murabahah Style 1) o One long term xed rate Tawarruq and multiple oating rate Tawarruq (Murabahah Style 2) o Promise based PRS Group Discussion: Risks in the dierent PRS structures? Comparing PRS to a conventional IRS Cross Currency Swap (CCS) Are there any Shariah issues with a conventional CCS? Cross Currency Swap versus Cross Currency Deposit PRS versus CCS will there be any dierences in underlying structure?
Group Exercise: Applying PRS and CCS for dierent client needs.
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Day 2
Futures and Options Shariah issues in conventional futures & options Arbun versus Promise based solution for: o Currency o Commodity o Financial securities Funded versus unfunded options AAOIFI Standards Applicable for Shariah Compliant Derivatives Summary of AAOIFI accounting for Murabahah What is the accounting eect of promises under AAOIFI? Does Arbun have any accounting implication? Application of AAOIFI Standards to Shariah Compliant Derivatives In this session dierent groups will focus on dierent underlying structures we have covered before and discuss the accounting implication from Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) perspective. The main focus will be the balance sheet eect of Shariah compliant derivatives under AAOIFI. o Forward promise versus Murabahah versus FX Swap o PRS & CCS promise versus Murabahah 1 versus Murabahah 2 o Options promise versus Arbun versus Murabahah
Group Exercise: Applying structured Tawarruq with option components for capital protected funds.
Denition of a Derivative under IFRS Denition of a derivative under IFRS o What is an underlying? o How do you determine what the initial net investment is? o What constitutes settled at a future date?
Group Exercise: Applying the IFRS denition to Shariah compliant derivatives do they meet the denition? o Forward o PRS & CCS o Options funded and unfunded
Day 3
IFRS Recognition and Measurement Principles General recognition and measurement principles o How are derivatives generally accounted for under IFRS? o Are there other IFRS (besides derivatives) applicable for accounting for Shariah compliant transactions with derivative-like features? Why or why not? How are sales (compare to Murabahah), promises (compare to Waad) and down payment (compare to Arbun) accounted for under IFRS? Which guidance would take precedence (derivative or sale/promise/down payment guidance)? How does the IFRS approach of substance over form impact the accounting conclusions for Shariah compliant derivative-like transactions? How would these conclusions compare to AAOIFI? Applying IFRS Recognition Principles to Shariah Compliant Derivatives In this session dierent groups will focus on dierent underlying structures we have covered before and discuss the accounting implication from IFRS perspective. Does the underlying structure aect which IFRS we will apply? Why or why not? Forward promise versus Murabahah versus FX Swap PRS & CCS promise versus Murabahah 1 versus Murabahah 2 Options promise versus Arbun versus Murabahah How does this compare to the conclusions reached under AAOIFI? Hedge Accounting & Fair Value Measurement What are the dierent types of hedging relationships allowed under IFRS? What are the documentation requirements for hedge accounting? What are the recognition and measurement principles for hedging relationships? How is the eectiveness of hedging relationships tested? Fair value measurement methodologies (IFRS 13)
Group Discussion: Using Shariah compliant derivatives for hedging versus trading?
Embedded Derivatives Identication o What is an embedded derivative and what is a host contract? o How do you determine if the economic characteristics and risks of the derivative are clearly and closely related to the host contract? Recognition and measurement principles o How should embedded derivatives be accounted for?
Group Exercise: Shariah compliant instruments with potential embedded options lease with promise to (re) purchase, Sukuk, capital protected fund. How would these options impact the nancial statements?
Prospective Derivative Guidance under IFRS (IFRS9 which replaces IAS 39) What changes have been made to general recognition and measurement principles? What changes have been made to hedge accounting? What changes have been made to embedded derivative principles? Eective date
Group Discussion: How would the proposed changes to IFRS impact the prospective accounting for Shariah compliant derivatives?
Course Wrap-up and Conclusion
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IFT1232/P