6 lecture takaful

8/15/2019 6 Lecture Takaful

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Lecture 6Accounting , reporting and governance of Takaful activities

Mohd Khairy Kamarudin


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Nature of Takaful and its eects on

accounting & reporting The most important factor that distinguishes a

takaful scheme from its conventionalcounterpart is the donation feature.


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Nature of donationDonation in takaful contract is a mutual act of good

deeds and righteousness among policyholders.

t may tied to a particular condition for its type oramount.

f indemnity does not e!ceed the fund, a surplusarises and the "ene#t is to the policyholders.

f indemnity e!ceeds the fund, a loan can "egranted "y the operator $ith the understanding

that such loan to "e recovered from any surplus ofsu"se%uent years.


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articipationprinciple of donation for the policyholders

principle of participation for the shareholders.articipation involves the contract of investment.

The slamic 'urists vie$ed that the takaful operator

should present and disclose all information relatingto the process to the policyholders.

This disclosure $ill make them a$are that the Takaful activities are done in a legitimate

cooperative manner and free from gharar or anyelements of ri"a, maysir, and other prohi"itionsthat render the contract void or voida"le.

That is their right since the insured pays

contri"utions that are $holly or partially donated to


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(eporting frame$ork and relevant

accounting standards Takaful operator is responsi"le to disclose all information on its

processes to the policyholder.

The disclosure re%uirements have to meet the o"'ective of)tatement of *inancial Accounting No. + & of AA-* "y providing

the follo$ing information)hariah compliance of operations of slamic nsurance /ompany 0/1.

To assist in separating prohi"ited earnings and e!penditures.

(esponsi"ility 0and method1 of determination of 2akah.

Treatment of de#cit and "usiness risk.

Assessment of inherent risk in insurance and reinsurance.3stimation of cash 4o$s.

To evaluate /5s capa"ility to generate reasona"le rates of returnfrom investment of funds.

To evaluate role in ful#lling social responsi"ility.


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mportant )hariah contractualconditions and accounting principles6efore a contract is signed "et$een the

participants and the operator, there are someconditions $hich must "e follo$ed3!istence 0recognition1

7a$ful 0recognition1Measura"le 0measurement1

Delivera"le 0recognition & measurement1

3%uita"le 0distri"ution1

Accounta"ility 0disclosure & presentation1


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3!istence 0(ecognition1 The e!istence of a valid contract is necessary

"efore a transaction can "e recogni2ed.

8hen the contract is duly concluded andsigned, all contractual conditions must "efollo$ed to render the transaction valid ande!isting.

7a$ful0(ecognition1 The recognition process $ould also take into

consideration the la$fulness of the economicactivities.

(evenue is not recogni2ed if the activity is


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Measura"le 0measurement1recise measurement is an essential condition

to avoid unla$ful transactions.

9ence the scale and "asis of measurementshould "e re4ective of the real economiccondition.

Delivera"le 0(ecognition & measurement1Delivera"le goods are also an essential

condition to avoid gharar and timing ofrecognition and a"ility to measure $ill also takeinto account this condition.


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3%uita"le 0Distri"ution13%uita"le in dealings "et$een the contracting

parties include the manner of distri"ution"et$een the Takaful operators and participants.

t involves the determination of reasona"lerates of returns from the contracted pro#tsharing ratio.

Accounta"ility 0Disclosure & resentation1An essential mechanism to attain accounta"ility

is through proper and ade%uate disclosure andreporting to the other party:ies involved in the

transaction.


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/omplete set of #nancial statementsfor slamic insurance: takaful company

)tatement of *inancial osition)tatement of olicyholders5 revenue and e!penses

ncome )tatement

)tatement of /ash *lo$s)tatement of /hanges in -$ners5 3%uity

)tatement of olicyholders5 )urplus 0De#cit1

)tatement of )ources & the use of ;akat and

/harity *unds.Notes to *inancial )tatements


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)peci#c Disclosures


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resentation of )tatement of

*inancial ositionAssets

Liabilities + Policyholdersequity + owners equity

/ash & cash e%uivalents

nvestments

/ontri"utions receiva"les

*i!ed assets 0net1

Development cost

-utstanding claims


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resentation of olicyholders5

revenue & 3!pensesnsurance revenue3arned contri"utions

=ross contri"utions 0less1 reinsurers5 shares

Net retained contri"utions0less1 changes in unearned contri"utions

(einsurance commissions

nsurance e!penses0paid claims > recovered claims1 ?

0outstanding claims > recovered claims1 ?(emuneration of o$ner5s e%uity @fees

Net surplus from insurance operations

Net investment income

)urplus or (evenue 0over1 e!penses


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)tatement of policyholders5

surplus0de#cit1Beginning balance Xxxxxxxx

Add 0less1 )urplus 0de#cit1forthe year

B!!!!!!!!

Availa"le surplus foryear

B!!!!!!!!

7ess Distri"ution topolicyholders

0!!!!!!!!!1

3nding residual"alance

B!!!!!!!!


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llocation models for insurancesurplus or de#cit

)urplus

Allpolicyholders

olicyholdersand

shareholders

olicyholdersthat do not

claim orclaimlessthan their

contri"ution

olicyholdersthat have not

claimed


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De#cit

(eserves ofpolycyholders

(e%uestspolicyholders

to meetde#cit proC

rata

increasefuture

premiumcontri"ution

ofpolicyholderson proCrata

"asis

"orro$ fromshareholders

funds orother funds


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Disclosure "ases for determining

and allocating surplus or de#citn Takaful, there is a need to disclose the allocation of

surplus or de#cit due to the need to determine therelationship "et$een the policyholders and shareholders.

)egregation of their assets, o"ligations and result ofoperations.

There is a need to allocate surplus in a fair manneramong policyholders.

This disclosure of varying allocation "ases functions to

assist in decision making and fair reporting.Any failure to disclose the process of the allocation may

cause other pro"lems among the policyholders andshareholders in the future.


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Nature of the )hariah )upervisory6oard

A shariah supervisory "oard is appointed to ensure)hariah compliance of the company.

6oard is an independent "ody of specialised 'uristsin #%h alCmuamalat 0slamic commercial la$1 that is

entrusted $ith the duty of directing, revie$ing andsupervising the activities of slamic #nancialinstitution in order to ensure that they are incompliance $ith slamic rules.


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=overnance )tandards and /ode of

3thics=overnance standards and code of ethics of the

)hariah )upervisory 6oard that must "e adhered "ythe slamic #nancial institutions

=overnances standards )hariah supervisory "oard

)hariah revie$

nternal )hariah revie$

Audit and =overnance /ommittee

3thics /ode of 3thics for Accounting and Auditors of slamic #nancial

nstitutions

/ode of 3thics for the employees of slamic #nancialnstitutions


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mpact of disclosure on governanceDisclosure "ene#tsrovide con#dence to investors and policyholders on the

)hariah compliance of the transactions and activities.

)afeguards the interest of "oth shareholders andpolicyholders.

Allo$ clear distinction "et$een donation and investmentactivities and their related contracts.

rovides useful information on treatment of surplus for

takaful operations and surplus for investments.3nhance reporting accounta"ility and performance

measure of takaful operator cum fund manager.

Allo$s compara"ility of accounting information from variedtakaful practices.

6 lecture takaful

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