Accounting for Zakat

Transcription

1. Emerging Issues on Accounting & Reporting of Zakat: A Personal Reflection Prof. Dr. Abdul Rahim Abdul Rahman Kuala Lumpur Metropolitan University College (KLMUC) (abdulrahim.iium@gmail.com) 1
2. Meanings of Zakat General Meaning “a compulsory levy imposed on the Muslims so as to take surplus money or wealth from the comparatively well-to do members of the Muslim Society and give it to the destitute and needy”. Literal Meaning (Arabic word) 1. ‘Growth’ or ‘Increase” Giving Zakat will increase in prosperity in this world and religious merit in the hereafter. 2. ‘Purity’ Purifies from sins (“take from their property (sadaqah) in order to purify them (tuzakkihim)” Al-Qur’an 9:104. Note: Both meanings have spiritual connotations.
3. Issue 1 : What could be the generally accepted accounting principles on Zakat? 3
4. Principles of Zakat Accounting 1 . Individual Right of Ownership Wealth belongs to government, community or Waqf is not subjected to Zakat 2. The valuation of assets should be based on current or market value. show the most accurate and relevant value of the assets measure the net worth of the individual/company 3. Yearly principle assets should be owned for one full year (Haul). Zakat charged only once a year (except for agriculture produce) 4
5. Principles of Zakat Accounting 4 . Ability to Pay The aim of Nisab (minimum requirement) is to ensure Zakatable wealth is in excess of normal requirements. 5. Full Disclosure Zakat computation must be true and fair Zakat payers need to truthfully disclosed all his/her financial facts. In the case of companies, is the audited financial statement a reliable financial fact? 6. Objectivity (True and Fair View) Measurement must be objective and quantifiable Justice to both Zakat payers (who hold the financial obligation) and Zakat beneficiaries (who are the rightful recipients of Zakat). 5
6. Issue 2 : What is the most appropriate basis of asset valuation for Zakat purposes? 6
7. Basis of Asset Valuation : An Islamic Perspective Ibn Rushd: Historical Costs Jabir Ibn Ziyad: Sale (Market) Value on the day Zakat is determined Prof. Monzer Kahf: Lower of Cost or Market Value Prof. Shehatah: Current Price/Selling Price/Market Price (expected or estimated) AAOIFI FAS 9: Cash Equivalent Value 7
8. Fair Value Accounting Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable , willing parties in an arm’s length transaction Fair value has been introduced in IFRS as A means of putting a value on an incomplete transaction A measurement attribute for subsequent measurement in a number of significant standards
9. Fair Value Measurement Fair value is a market-based measurement and as such not affected by factors specific to a particular company If available , an observable market price in an active market is the best evidence of fair value But what if: a) there is more than one market price b) the market is illiquid c) there are no recent prices d) there is no market for the specific item to be measured Reliability and objectivity concerns
10. Financial instruments Financial instruments include cash , receivables, payables, equity and debt instruments as well as derivatives and some commodity contracts FRS 139 Financial Instruments: Recognition and Measurement establishes principles for recognizing and measuring financial instruments
11. Fair Value Framework - Measurement Fair value hierarchy Prioritizes inputs to the valuation technique used to measure fair value Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities Level 2 – inputs and other quoted prices included in Level 1 that are observable either directly or indirectly Level 3 – unobservable inputs reflecting the reporting entity’s own assumptions about market participant assumptions
12. Fair Value Framework - Measurement Valuation techniques consistent with market , income and/or cost approaches shall be used to measure FV Market Approach – Uses observable prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities Income Approach – Converts cash flow or earnings to a single present amount (discounted) . Value indicated by current market expectation about future amounts Cost Approach – Amount that would currently be required to replace the service capacity of an asset (current replacement cost) Use valuation techniques that are appropriate in the circumstances and for which sufficient data are available
13. Fair Value Accounting - Issues The Problem – Reliability of measures Different parties could get inconsistent measures Possible for management to influence measures Financial statement users still prefer fair value while many do not believe the “market” is always the most accurate reflection of a transaction/account
14. Cash Equivalent Value or Fair Value ? AAOIFI FAS 9 for Zakat prefers Cash Equivalent Value (CEV) IFRS prefers Fair Value (FV) especially for financial assets. However, CEV is not FV! Do we still remember Realisation Principle i.e. recognise when realised? How to realise the value based on fair value and current cash equivalent without selling the asset or objectives measurement techniques? Thus, if failed realisation test, then no recognition. How about prudence concept? Does FV violates prudence principle?
15. Is Fair Value , really fair? Is FV really reflects true value? Fair to whom? Preparers (IFIs) or Users (investors, shareholders etc.) or both? Shari’ah issue: Is quoted market price even if available reflect true value? Will FV leads to Gharar? How about the speculative value of financial assets? How about changes in economic situation (booming vs. recession) that affect value? Since many IFIs will be adopting FRS 139, the challenge for accountants in IFIs to account, measure and report objectively.
16. Method of Assets Valuation for Zakat AAOIFI FAS 9 : Market Value (market selling price or cash equivalent value) whenever possible Reasons: Zakah base should include the historical cost and any holding gains (or losses) To reflect the true value of the assets and the current financial position of the entity However, trade liabilities, long term liabilities, equity, and fixed assets are permissible to be valued at book value Differences in valuation will affect the assessment and adjustment of the differences in the valuation need to be provided 16
17. AAOIFI FAS 9 AAOIFI : Cash Equivalent Value (most preferred in the case of Zakat valuation if the following are available): availability of objective indicator; relevant information; logical and relevant valuation consistency of valuation methods experts valuation conservatism in the valuation process
18. Issue 3 : What should be the most appropriate method of Zakat measurement for financial assets? 18
19. Zakat Accounting for Shares and Sukuk If shareholders or investors acquired the shares for long-term investment or as a way to gain control over the company ’s capital (Held to Maturity), or as a participation (stake) in the company’s capital, the shares are considered as fixed assets. Thus, only its income generated (i.e. dividend) will be subjected to Zakat at 10% (as for agriculture produce). If shareholders acquired the shares for trading activity, it is considered current assets, and its value and income is subject to Zakat. Thus, Zakat on Shares = (Market Value of Shares x Quantity) x 2.5%. 19
20. Zakat Accounting for Shares and Sukuk Zakat on Sukuk has been argued should be charged as a form of valuable trading commodity . Thus, Zakat for Sukuk = (Current Market Value x Quantity) x 2.5% Is quoted market price of shares and sukuk at the end of the zakat year is the best valuation for Zakat purposes? What option do we have? How about the haul requirement? Why don’t we average out i.e. Average Daily Net Asset Value of the shares and sukuk throughout the year? If shares are traded in the open market then it is possible. 20
21. Issue 4 : Why do we have difficulties to comply with AAOIFI FAS 9 on Zakat for IFIs? 21
22. AAOIFI Financial Accounting Standard No . 9 Why do we need Accounting Standard for Zakat? Consistency Comparability Compliance Scope of the Standard: (1) The determination of Zakah base (methods of assessment) (2) The measurement of items included in the Zakah base (methods of valuation) (3) Disclosure requirements in the Financial Statement 22
23. AAOIFI FAS 9 Effective beginning 1 Muharam 1420H or 1 January 1999 However , in many Muslim countries the standards served only as guidelines which they are not supposed to be complied with This is due to the required compliance with the respective countries Central Bank guidelines and bylaws 23
24. AAOIFI FAS 9 : Reporting Requirements Methods used for determining Zakah base and items included in the base The ruling of the Syari’ah Board of the Islamic Bank on issues related to Zakah that are not included in the standard Statement on whether or not the Islamic Bank as a holding company pays its share of Zakat obligation of its subsidiaries In the case the Islamic Bank does not pay Zakah, the amount of Zakah due should also be disclosed 24
25. AAOIFI FAS 9 : Reporting Requirements Whether or not the Islamic bank collects and pay Zakah on behalf of the holders of the investment accounts and other accounts Restrictions imposed by the Syari’ah Supervisory Board of the Islamic Bank in determining Zakah base The disclosure requirements of FAS 1: General Presentation and Disclosure in the Financial Statements of Islamic Banks and Financial Institutions shall be observed 25
26. Issue 5 : Is conventional accounting and reporting standards address the needs of zakat accounting and reporting? 26
27. Fairness in Accounting Fairness = Neutrality of the accountant in the preparation of annual reports Scott (1941) “Accounting rules, procedures and techniques should be fair, unbiased and impartial. They should not serve a special interest” (Is it possible?) Fairness = Conservatism (Prudence) = Objective Lee (1976) “Accounting must be based on firm, verifiable evidence (whenever possible), and it must not be such as to tend to benefit a particular user (or group of users) to the relative detriment of others” (Is it possible?)
28. True and Fair View ? True = “accounting information contained in the financial statements has been quantified and communicated in such a way as to correspond to the economic events, activities and transactions it is intended to describe” (Lee, 1971) Fair = “accounting information has been measured and disclosed in such a manner which is objective and without prejudice to nay particular sectional interests in the company” (Lee, 1971) What does it means by faithful representation? Do we have objective measure? What are the guiding principles?
29. Questions to ponder 1 . Is accounting a value-free and neutral scientific 2. 3. 4. 5. knowledge just like computer science, physics, chemistry etc.? Since accountants are human beings, do you think accounting is an objective and scientific knowledge or a subjective and social science kind of knowledge? How `true’ and `fair’ is conventional accounting for zakat purposes? Would the accountants belief-system or ideology affect accountants and accounting? Would the different economic and financial system lead to different accounting system?
30. Islamic Worldview & Accounting Transcendental accountability to Allah SWT (Hablumminallah) Social accountability to the society (Hablumminan-nass) Individuals as trustees or Khalifah (vicegerents) Success in this world and in the hereafter (Falah) Economic goals beyond purely wealth maximization and include Tazkiyah (purification of self and wealth i.e. Zakat) Personal accountability (Taklif) Justice (Adalah) in relationships, contracts, and activities Maslahah i.e. public interest is more important than personal interest.