Regulation on Requirements for the Accounting Policy of Commercial Banks Conducting Operations in Accordance with Islamic Principles of Banking and Financing

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Date of creation: 2022-11-28

Approved

by the Resolution of the Board of Directors

of the National Bank

of the Kyrgyz Republic

No. 39/5 dated September 30, 2009

REGULATION

on requirements for the accounting policy of commercial banks,

carrying out operations in accordance with Islamic

principles of banking and financing

(amendments approved by the Resolution of the Board of NBKR dated March 14, 2012 No. 11/2, June 15, 2017 No. 2017-P-12/25-12-(NPA), November 16, 2022 No. 2022-P-12/70-1-(NPA))

This Regulation defines the basic requirements imposed by the National Bank of the Kyrgyz Republic on the accounting policy of commercial banks carrying out operations in accordance with Islamic principles of banking and financing, including banks having an "Islamic window" (hereinafter referred to as banks).

1. Concept and purpose of the bank's accounting policy

1.1. The bank's accounting policy is a set of principles, bases, rules, conditions, procedures, and methods adopted by the bank for the purpose of maintaining accounting records in accordance with the current legislation of the Kyrgyz Republic.

1.2. The main goal of the bank's accounting policy is to create a unified system of accounting that ensures the reliable presentation of financial statements and the underlying internal control system of the bank.

1.3. The bank's management, in accordance with the Law of the Kyrgyz Republic "On Accounting," determines and applies the accounting policy so that the methodological basis for maintaining accounting records and preparing financial statements of banks carrying out operations in accordance with Islamic principles of banking and financing meets the requirements of accounting standards for Islamic financial institutions developed by the Accounting and Auditing Organization for Islamic Financial Institutions (hereinafter referred to as AAOIFI).

2. Format of the bank's accounting policy

2.1. The format of the bank's accounting policy is chosen by the bank independently. The main requirement for it is compliance with the methodological principles of AAOIFI and a complete coverage of issues related to the organization of accounting and the internal control system. The approximate structure of the bank's accounting policy is presented in Appendix 1 to this Regulation.

A bank carrying out operations in accordance with Islamic principles of banking and financing through an "Islamic window" must, in the established manner, adopt a separate accounting policy providing for the corresponding procedure for maintaining accounting records.

2.2. The bank may form its accounting policy in one of two ways:

• the general order and accounting principles for each type of operation are described in a separate policy;

• the order and principles of accounting for the bank's operations are described in one policy with each type of operation reflected in a separate section.

2.3. Regardless of the method of formation, the bank's accounting policy must contain a description of accounting for each type of operation carried out by the bank in accordance with Islamic principles of banking and financing:

• Accounting principles for Murabaha operations;
• Accounting principles for Mudaraba operations;
• Accounting principles for Diminishing Musharaka operations;
• Accounting principles for Salam and Parallel Salam operations;
• Accounting principles for Istisna'a and Parallel Istisna'a operations;
• Accounting principles for Ijara and Ijara Muntahia Bit Tamlik operations;
• Accounting principles for Qard operations;
• Accounting principles for Wadi'ah Yad Amanat (Safe Custody) operations;
• Accounting principles for Wadi'ah Yad Dhamanah (Guaranteed Custody) operations;
• Accounting principles for currency operations;
• Accounting principles for the profit equalization reserve.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated November 16, 2022 No. 2022-P-12/70-1-(NPA))

3. Basic requirements for the content

of the bank's accounting policy

3.1. The bank's accounting policy as a whole and with respect to each type of operation carried out by the bank must comply with the following fundamental assumptions:

• property segregation;
• continuity of operations.

3.2. The bank's accounting policy must reflect requirements from which the following principles of financial statement presentation will be observed:

• qualitative characteristics - understandability, relevance, comparability, reliability, consistency, materiality;

• limitations of relevance and reliability of information - timeliness, balance between benefits and costs, balance between qualitative characteristics, faithful and objective presentation.

3.3. The bank's accounting policy must include a detailed description of accounting practices and organization in the bank in accordance with the AAOIFI Standards Concept:

a) recognition criteria for each element of financial statements: assets, liabilities, equity, income, expenses, funds of owners of unrestricted and restricted investment accounts of the bank;

b) valuation methods for elements of financial statements applied in the bank;

c) the Chart of Accounts accepted in the bank for Islamic principles of banking and financing and the Procedure for preparing financial statements in accordance with Islamic principles of banking and financing;

d) types of accounting used in the bank, their purpose and significance (on-balance sheet, off-balance sheet, and off-system);

e) conditions allowing changes in the bank's accounting policy and accounting estimates;

f) disclosure of policies adopted by the bank that do not correspond to financial reporting concepts, if any;

g) policies adopted by the bank for reflecting and determining doubtful debts, and policies for writing off debts;

h) policies, basis, and methods adopted by the bank for revaluing the cost of assets, liabilities, and restricted investments to their equivalent monetary value, if applicable;

i) use of historical cost as the basis for determining the equity share of owners of unrestricted investment accounts and their equivalent (or restricted investment accounts or their equivalent) if revaluation of the cost of assets, liabilities, and reinvestments to their equivalent monetary value is not mandatory;

j) accounting policies adopted by the bank for the consolidation of financial reports of subsidiaries, if any;

k) other bases and rules of accounting not contradicting AAOIFI standards and adopted in the bank.

3.4. The bank's accounting policy must define the responsibility of the bank's management and the chief accountant regarding the organization of accounting, compliance with the legislation of the Kyrgyz Republic in carrying out banking activities, and maintaining accounting records in the bank.

The bank's accounting policy must define the responsibility of bank officials for making decisions in the event of a non-standard operation (new for the bank or one-off and not described in the bank's accounting policy) regarding its reflection in accounting records (infrequent immaterial and infrequent material operations).

3.5. For each type of the bank's assets and liabilities, the principles, rules, and conditions for accounting for assets and liabilities upon initial recognition, subsequent accounting (revaluation, reclassification of assets, subsequent costs, recognition of impairment, etc.), and their accounting upon disposal must be described.

3.6. In cases where AAOIFI standards provide for both a primary and an acceptable alternative method of accounting for assets and liabilities, the bank must clearly indicate the method of accounting chosen by the bank for each type of assets and liabilities.

In this regard, the bank must strictly adhere to the requirements of AAOIFI standards regarding the applicability of various accounting methods, and preference should be given to the more conservative method.

3.6-1. Within the framework of the accounting policy, detailed rules for the organization of accounting for payment and settlement operations and their reflection in accounting accounts must be developed, as well as corresponding rules for organizing internal control. In this regard, each operation must be timely reflected in the accounting records (automated accounting system) of the financial and credit organization (hereinafter referred to as FCO).

The rules for organizing accounting for payment and settlement operations must contain, among other things, the following main norms:

1. all operations must have documented confirmation from the bank-counterparty regarding the debit/credit of funds to the account;

2. reflection of operations in the bank's accounting records must be carried out in accordance with accounting rules and:

a) for payments in national currency - no later than the date of the settlement;

b) for outgoing payments in foreign currency - on the day of debiting funds from the FCO account, which must be confirmed by corresponding documents and subsequent receipt of a statement from the correspondent bank;

c) for incoming payments in foreign currency - no later than the day of receipt of confirmation of the credit of funds.

(In the edition of the Resolution of the Board of the National Bank of the Kyrgyz Republic dated June 15, 2017 No. 2017-P-12/25-12-(NPA))

3.7. When developing the Bank's Accounting Policy, a number of factors that may affect the specifics in choosing approaches to reflecting operations in the bank's accounting book must be taken into account.

These factors include:

• organizational and legal form of the bank;

• features of the bank's activities according to the Bank's Charter and business plan;

• presence of branches;

• scale of activities;

• nature of the material and technical base ensuring the development of the bank.

4. Procedure for development, approval

and revision of the bank's accounting policy

4.1. The bank's accounting policy must be approved by the Bank's Board of Directors and endorsed by the Shariah Council.

4.2. The bank must constantly, but no less than once a year, monitor changes and additions to AAOIFI standards, as well as the entry into force of new standards developed by AAOIFI, and, if necessary, make changes to the bank's accounting policy. The following is not considered a change in the accounting policy:

a) adoption of a new edition of the accounting policy;

b) adoption of a new accounting policy due to operations or events that arise for the first time or occurred in the past but were not used by the bank;

c) changes in the classification of financial reports of the current period compared to the classification of the previous period's financial reports.

5. Methodological basis for the formation

of the bank's accounting policy

5.1. When forming the accounting policy, the bank must be guided by:

• the Law of the Kyrgyz Republic "On Accounting";

• legislative and regulatory legal acts of the Kyrgyz Republic regulating banking operations;

• standards developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI); in the absence of certain standards, the bank may use other standards provided that they do not contradict Shariah standards.

• this Regulation.

As additional methodological support, the bank may use accounting policies and other methodological materials developed by the National Bank of the Kyrgyz Republic for banks carrying out operations in accordance with Islamic principles of banking and financing.

Appendix 1

to the Regulation on requirements

for the accounting policy of commercial

banks carrying out operations

in accordance with Islamic

principles of banking

and financing

ACCOUNTING POLICY

---

(name of the bank)

Section 1. General provisions of the bank's accounting policy

Purpose of the bank's accounting policy

Responsibility for the organization of accounting and compliance with the legislation of the Kyrgyz Republic in carrying out banking activities, maintaining accounting records, and conducting business operations of the bank.

Scope of application of the bank's accounting policy (depending on the format of the accounting policy for Islamic principles of banking and financing chosen by the bank) and the right to make decisions regarding the reflection in accounting of material and immaterial aspects.

Purpose of the bank's accounting policy

Main tasks of the bank's accounting policy

Compliance of the accounting policy for Islamic principles of banking and financing with AAOIFI standards in accordance with the legislation of the Kyrgyz Republic.

Organization of accounting, who carries out accounting in the bank (specify the structural unit; by the chief accountant/accountant or accounting is outsourced to an accounting firm).

Main principles of accounting applied in the bank

Section 2. Chart of Accounts accepted in the bank.

Section 3. Rules for preparing and presenting the bank's financial statements.

Section 4. The bank's accounting policy regarding each operation it carries out.

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