Central Bank of Jordan Circular No. 6/2020: Implementation of AAOIFI Accounting Standards 30, 35, 33, and 26

In the Name of Allah, the Most Gracious, the Most Merciful

Central Bank of Jordan

Number: 1/10/7859 Date: 13/11/1441 AH Corresponding to: 5/7/2020 AD

Instructions for Implementing the Accounting Standards Issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) No. (30) "Impairment of Assets, Credit Losses and High-Risk Obligations", (35) "Risk Reserves", (33) "Islamic Banks' Investments in Shares and Equity Stakes in Companies' Capital, Sukuk", and (26) "Investments in Real Estate" Number (6/2020)

Greetings,

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

First: The implementation of 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 an automated system 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: Accounting Standard No. (35) aims to identify 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, represented by profits and losses realized by 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: Accounting Standard No. (33) identifies the main types of Sharia-compliant investment instruments and determines accounting treatments consistent with 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 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 future value appreciation, or for both purposes.

Fifth:

1. Maintain 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), the amount equivalent to the required provisions for debt instruments/credit exposures classified in Stage 1 shall be considered, up to a maximum of (1.25%) of the total risk-weighted assets calculated according to the standardized 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 standardized 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 account [by comparing the results for provisions calculated for Stage 2 and Stage 3 separately (total of each stage)] through a mapping approach between Stage 2 and Stage 3 according to the requirements of Standard (30) with supervised credit exposures 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 in the retained earnings/equity balance as a self-financing adjustment.
5. It is the responsibility of the external auditor to verify the bank's procedures regarding the methodology and calculation of expected credit losses. The auditor must provide the Central Bank with a certificate regarding the procedures and the adequacy of the expected credit loss amount calculated by the bank with every financial statement.
6. The total real estate financing and finance leases (real estate) and investments in real estate shall not exceed (50%) of total customer deposits in Jordanian Dinars. This ratio shall be applied starting from 1/1/2021.
7. The 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 safety of the methodologies and mechanisms applied by banks for calculating expected credit losses through field visits to banks, and each bank will be informed of the arrangements to be followed.
9. It is necessary to comply with the quantitative and qualitative disclosures attached to the instructions and any other disclosures required by the standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), as well as providing the Central Bank with the statements attached to these instructions with every financial statement.

Please accept our highest respect,

Governor Dr. Ziad Frieze

Attachments:

1. The Instructions.
2. The required quantitative and qualitative disclosures.
3. A compact disc (CD) containing the statements required for the Central Bank.

Model (1/1/09/01)