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PRU 2.2.6 Guidance for Form PIB 2 — Balance Sheet — Islamic Financial Institutions

Instructional Guidelines

There are effectively three sets of returns for Category 5 institutions. Wherever appropriate, all balance sheet captions need to identify separately if they have arisen from self financed business (including finance from Amanah and demand deposits), from the business provided by utilising the unrestricted assets of PSIA asset providers and from the restricted PSIA business. Whilst AAOIFI permits unrestricted PSIA assets to be commingled with self financed assets for balance sheet reporting purposes, the need to maintain separate records for each asset class is paramount. Restricted PSIA assets and liabilities cannot be commingled with the former and should be reported off balance sheet.

In the event of any uncertainty, Authorised Firms are required to consult with DFSA to obtain the necessary clarity.

Item No. Item Guidance
2.1 Cash and Liquid Assets Include, for example, the following amounts:
•   Notes and coins;
•   Deposits at call;
•   Long positions in Gold bullion (including Tola Bars);
•   Amounts placed with central banks and other financial institutions including funds required to be placed on deposit with central banks and monetary authorities.
2.2 Investment Securities Report long term investment securities not held with intent to trade (short term securities are reported in "Other Assets", Item No 2.7 below). Include, for example:
•   Debt and equity issues by central banks and other financial institutions (Eurobonds, FRNs, Mortgage Backed securities, equity holdings, Sukuks etc.);
•   Investments in subsidiaries and associated companies;
•   Investments in the capital of other banks and financial institutions;
•   Holdings in non financial firms of which the Authorised Firm is a controller (i.e. "Qualifying Holdings").

Exclude any investments in certain named Islamic contracts which are included below (PIB 2 Item Nos. 2.4.1 to 2.4.7).
2.3 Loans and Advances Amounts arising from, for example:
•   Revolving credit facilities;
•   Credit cards outstanding balances;
•   Housing loans (both variable and fixed rates);
•   Term loans (both variable and fixed rates);
•   The book value of assets leased out under finance lease agreements;
•   Loans made under conditional hire purchase contracts;
•   Advances purchased by or assigned to the reporting institutions, factoring or similar arrangements
•   Other loans and advances.

The amounts reported should be gross of provisions (as specific and general provisions should be reported in the Liabilities section of the balance Sheet) and net of interest receivable.
2.4.1 Murabaha and Istisna'a Receivables Report here all receivables relating to Murabaha and Istisna'a contracts. Refer to FAS 2 and FAS 10 of AAOIFI respectively.
2.4.2 Ijarah assets Include Ijarah assets net of depreciation/ amortisation and Ijarah receivables. Refer to FAS 8 of AAOFI.
2.4.3 Mudaraba Financing Capital provided on a Mudaraba basis should be reported here. Refer also to FAS 3 of AAOIFI.
2.4.4 Musharaka Financing Report capital provided on a Musharaka basis. Refer to FAS 4 of AAOIFI. Investment in the Share capital of another company should be reported under "Other", Form PIB 2, Item No. 2.4.7.
2.4.5 Salam Capital provided on Salam contract should be reported here. Refer to FAS 7 of AAOIFI.
2.4.6 Parallel Istisna'a Parallel Istisna'a receivables/assets should be reported here. Refer to FAS 10 of AAOFI.
2.5 Fixed Assets Include, for example, the value of the following:
•   Plant and equipment, the residual value of items leased out under an operating lease (excluding balances relating to named Ijarah assets which should be included separately in Form PIB 2, Item No. 2.4.2);
•   Own premises being occupied or developed for occupation by the authorised institution, property (excluding property acquired / held available for sale which should be included in "Other Assets" in Form PIB 2, Item No. 2.7).

The amounts reported here should be net of accumulated depreciation and amortisation.
2.6.1 Goodwill Include amounts relating to any purchased goodwill.
2.6.2 Other intangibles Items to be included:
•   Capitalised development costs;
•   Brand names, trademarks and similar rights;
•   Licences and exchange seats which may be held as part of the Authorised Firm's trading requirement
2.7 Other Assets Assets that have not been included in any of the items above. In particular, positions in short term securities held with the intention of resale, sundry debtors, prepayments and accrued income not identified elsewhere.
2.9.1 Direct Credit Substitutes These relate to the financial requirements of a counterparty where the risk of loss to the reporting institution on the transaction is equivalent to a direct claim on the counterparty. Essentially the risk of loss depends on the creditworthiness of the counterparty. Include here:
•   Guarantees of a financial nature to stand behind the current obligations of customers (e.g. loan guarantees);
•   Guarantees of leasing operations;
•   Letters of Credit and Stand-by Letters of Credit to the extent that they do not qualify for inclusion in Item No. 2.9.3 "Trade related contingents" below;
•   Guarantees of a capital nature such as undertakings given to a non bank financial company which are considered as capital by the appropriate regulatory body. Guarantees given to a company not connected to the reporting institution should be risk weighted at 100% and those for connected companies should be deducted from the reporting institution's capital base.
•   Acceptances granted and risk participation in bankers' acceptances. Where the reporting institution's own acceptances have been discounted by that institution the nominal value of the bills held should be deducted from the nominal amount of the bills issued under the facility and a corresponding on balance sheet entry made.
2.9.2 Transaction related Contingents These exposures relate to the on-going trading activities of a counterparty where the risk of loss to the reporting institution depends on the likelihood of a future event which is independent of the creditworthiness of the counterparty. They are essentially guarantees that support particular non financial obligations rather than a customer's financial obligations. Include here:
•   Advance payment guarantees
•   Performance bonds including bid or tender bonds, warranties and indemnities (indemnities given for lost share certificates or bills of lading and guarantees of the validity of papers rather than of payment under certain conditions should be reported here);
•   Stand-by Letters of Credit relating to a particular contract or to non financial transactions (including arrangements backing, inter alia, subcontractors' and supplier's performance, labour and materials, contracts and construction bids).
2.9.3 Trade related Contingents Report short term self liquidating trade related items such as documentary letters of credit issued by the reporting institution which are to be collateralised by the underlying shipment i.e. the credit provides for the reporting institution to retain title to the underlying shipment. L/C's issued without provision for the reporting institution to retain title to the underlying shipment should be reported under direct credit substitutes above.
2.9.4 Sale and Repurchase Agreements Only report here sale and repurchase agreements where the asset sold is not reported on the balance sheet. If it is reported on the balance sheet, it should not be reported here but in the relevant on balance sheet section of the return. Where the asset is off balance sheet, the appropriate counterparty weighting is to be determined by the issuer of the security and not according to the counterparty with whom the transaction has been entered into.
2.9.5 Forward Assets Purchases The appropriate counterparty weighting should be determined by the asset to be purchased and not the counterparty with whom the contract has been entered into. Include commitments for loans and other on balance sheet items with certain drawdown. Exclude foreign currency spot deposits with value date of up to two working dates after trade date.
2.9.6 Forward Deposits Placed Relates to agreements between two parties whereby one will pay and the other receive an agreed rate of interest on a deposit to be placed by one with the other at some pre determined rate in the future. The weight should be determined according to the counterparty with whom the deposit will be placed. Exclude foreign currency spot deposits with value date of up to two working dates after trade date.
2.9.7 Uncalled partly-paid shares and securities Only include if there is a specific date for a call. If there is no specific date for a call, the item should be included as a long term commitment under PIB 2 Item No. 2.9.10 "Other Commitments".
2.9.8 NIF's and RUF's Note issuance and revolving underwriting facilities should include the reporting institutions underwriting obligations of any maturity. Where the facility has been drawn down by the borrower and the notes are held by someone other than the Authorised Firm, the underwriting obligation should continue to be reported at the nominal amount.
2.9.9 Endorsement of Bills These should be reported at the full nominal amount, less any amount for bills which the institution now holds but had previously endorsed. Endorsement of bills not accepted by banks will attract the counterparty risk weighting of the issuer. If it has been endorsed by another bank, a reduced risk weighting applies.
2.9.10 Other Commitments All other undrawn commitments are reportable here, divided into commitments under and over one year.
2.9.11 OTC Derivative Contracts Counterparty risk arising in both the non-trading and trading books should be calculated with reference to the Rules in PIB Section A4.5. Amounts to be reported here are the replacement costs/ NPV of such contracts
2.10 to 2.18.11 Assets financed by PSIAR The methodology for calculating exposures financed by PSIA assets are, in principle, no different to calculating exposures for a reporting institution's self financed assets. All the guidance notes above apply in their entirety unless stated otherwise.
2.20 Deposits Separately identify deposits due to clearing houses in PIB 2 Item No. 2.20.1 and other financial institutions in PIB 2 Item No. 2.20.2. All other deposits are to be reported in PIB 2 Item No. 2.20.3, "Other".
2.21 Tax Liability Report all items accrued and payable in respect of the institution's current and future tax liabilities.
2.22 Provisions All specific and general provisions in respect of Loans and Advances and other receivables should be reported here.
2.23.1 and 2.23.2 Liabilities arising from Islamic activities Include advances received against Parallel Salam contracts (defined in Para 3 and 19 of FAS 7 issued by AAOIFI and Ijarah investment payables (refer to FAS 8 of AAOIFI).
2.23.3 Liabilities relating to PSIAu Enter here the aggregate of all liabilities incurred on behalf of and amounts owed to PSIAu.
2.23.4 Other Enter all other liabilities incurred in respect of Islamic contracts.
2.24 Creditors and other Liabilities Report all items not included in any of the above, such as proposed dividends payable, sundry accruals and deferred income etc.
2.26.1 Liabilities relating to PSIAR Enter here the aggregate liabilities arising from the restricted assets of PSIAR.
2.26.2 Other Enter the aggregate of all other off-balance sheet liabilities here.
2.27.1 Ordinary Shares Include the amount of ordinary share capital issued, reported at nominal paid up value. Do not report the unpaid element of partly paid shares or authorised but unissued share capital. Authorised Firms must exclude holdings in their own shares.
2.27.2 Preference Shares Fixed dividend share capital that ranks above ordinary shares in the event of liquidation. Report the value of the preference shares issued.
2.27.3 Partnership Capital and other Include here other types of equity which have the same properties of permanent share capital. This could include partnership capital accounts, capital items for unincorporated associations etc.
2.29 Share premium Account Any amounts received by the authorised institution in excess of the nominal paid up value.
2.30.1 Asset revaluation reserve Enter amounts arising from the revaluation of assets for which it has been necessary to set up this reserve.
2.30.2 Investment Risk Reserve Category 5 Authorised Firms should include in respect of this item the amount that is appropriated out of the income of investment account holders, after allocating the Mudarib share, in order to meet future losses attributable to investment account holders. Refer also to FAS 11 of AAOIFI.
2.30.3 Profit Equalisation reserve Category 5 Authorised Firms should include in respect of this item the amount appropriated out of the Mudaraba income, before allocating the Mudarib share, in order to maintain a certain level of investment returns for investment account holders and to increase owners' equity. Refer also to FAS 11 of AAOIFI.
2.30.4 Goodwill and other Enter amounts arising from purchased goodwill or other situations for which it has been necessary to set up a goodwill or other reserve.
2.31 Total Reserves Sum of Item Nos. [2.30.1 + 2.30.2 + 2.30.3 + 2.30.4] above.
2.33 Minority Interests Report amounts attributable to minority shareholders from the overall equity figure.
2.34 Total shareholders' equity Sum of PIB 2 Item Nos. 2.28 + 2.29 + 2.31 - 2.33.
2.35 Total liabilities and shareholders' equity Sum of PIB 2 Item Nos. 2.25 + 2.34.