Central Bank Instructions No. 6/2020 on Implementing AAOIFI Financial Accounting Standards

10/1/7859
13/ 11 /1441 AH
5/ 7 /2020 AD
Instructions for Implementing the Financial Accounting Standards Issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) No. (30) "Impairment of Assets, Credit Losses, and High-Risk Liabilities", (35) "Risk Reserves", (33) "Islamic Bank Investments in Shares and Equity Stakes in Companies' Capital, Sukuk", and (26) "Real Estate Investments" No. (6/2020)

Greetings,

Based on the provisions of Article (99/b) of the Banking Law No. (28) of 2000 and its amendments, we attach herewith a Compact Disc (CD) containing the instructions for implementing the financial accounting standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) No. (30) "Impairment of Assets, Credit Losses, and High-Risk Liabilities", (35) "Risk Reserves", (33) "Islamic Bank Investments in Shares and Equity Stakes in Companies' Capital, Sukuk", and (26) "Real Estate Investments",

Referring to the following:

First:
The implementation of Financial Accounting Standard No. (30) includes (in addition to the accounting framework) a methodology for risk management, specifically credit risk management, aimed at preserving the safety and solidity of the Bank's financial position. This requires the Bank's Board of Directors and the relevant committees emanating from it to verify the existence and application of appropriate credit risk management policies, which entails the existence and application of effective internal control systems, internal credit rating systems, and automated systems for calculating expected credit losses, along with appropriate inspection and verification procedures. This system must be capable of achieving results that ensure adequate hedging against expected credit risks. Therefore, the Board of Directors must provide the appropriate governance structure to ensure the proper application of the requirements of these standards.

Second:
Financial Accounting Standard No. (35) aims to define and establish accounting and financial disclosure principles for risk reserves in line with global best practices for accounting and risk management to mitigate various risks faced by investment account holders and shareholders. These risks are manifested in the realized profits and losses of investors in Islamic banks. It also provides guidelines for maintaining reserves, evaluating and accounting for different risks, as well as recognizing the need for varying levels of reserves in accordance with the nature of the risks.

Third:
Financial Accounting Standard No. (33) defines the main types of Sharia-compliant investment instruments and specifies accounting treatments appropriate to the characteristics of the Bank's business model under which investments are managed. It aims to establish principles for the classification, recognition, measurement, presentation, and disclosure of investments in Sukuk, shares, and other similar instruments.

Fourth:
According to Financial Accounting Standard No. (26), the Bank must establish accounting rules governing the recognition, measurement, presentation, and disclosure of investments made by Islamic banks in real estate acquired for the purpose of generating periodic income, or for anticipating an increase in its value in the future, or for both purposes.

Fifth:

1. The retention of any surplus balance of the General Banking Risk Reserve item (if available) as restricted and undistributable as dividends to shareholders. It may not be used for any other purposes except with prior approval from the Central Bank.

2. For the purpose of calculating regulatory capital (Tier 2 Capital), consideration shall be given to an amount equivalent to the required provisions for debt instruments/credit exposures classified in Stage 1, not exceeding (1.25%) of the total risk-weighted credit assets calculated according to the standard method. The value of these provisions shall not be deducted from the credit exposure amount (capital adequacy ratio denominator) except to the extent that it exceeds (1.25%) of the total risk-weighted assets according to the standard method.

3. The Central Bank's Instructions No. (47/2009) dated 10/12/2009 and its amendments, and our Instructions No. (60/2014) dated 17/11/2014, shall continue to apply, taking the more stringent results into consideration. [The results for provisions calculated for Stage 2 and Stage 3 separately (total of each stage) shall be compared through a mapping between Stage 2 and Stage 3 according to the requirements of Standard (30) with credit exposures under monitoring and non-performing credit exposures, respectively, according to Instructions No. (47/2009)].

4. Any modification in the expected credit loss balance resulting from a change in the methodology and systems applied by the Bank shall be recorded as a difference in the retained earnings/equity balance for self-financing.

5. It is the responsibility of the external auditor to verify the soundness of the Bank's procedures regarding the methodology and calculation of expected credit losses. The Bank must provide the Central Bank with a certificate from the external auditor regarding the soundness of the procedures and the adequacy of the expected credit loss amount calculated by the Bank, along with each set of financial statements.

6. Total real estate financing and sale-and-leaseback transactions (real estate) and real estate investments shall not exceed 50% of total customer deposits in Jordanian Dinars. This ratio shall be applied starting from 1/1/2021.

7. Total investment in real estate shall not exceed 40% of the Bank's regulatory capital or 10% of total customer deposits in Jordanian Dinars, whichever is lower.

8. The Central Bank will take the necessary measures to verify the soundness of the methodologies and mechanisms applied by banks to calculate expected credit losses through field visits to banks. Each bank will be informed of the arrangements to be followed.

9. It is imperative to comply with the quantitative and qualitative disclosures attached herewith to the instructions, as well as any other disclosures required by the standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). The Central Bank must also be provided with the schedules attached herewith to these instructions with each set of financial statements.

Please accept our highest regards,

The Governor
Dr. Ziad Friez

Attachments:

• The Instructions.
• The required quantitative and qualitative disclosures.
• Compact Disc (CD) containing the schedules required for the Central Bank purposes.

Instructions for Implementing Islamic Accounting Standards / 2020 Fawzi Al-Sous