ACCOUNTING FOR SALAM AND PARALLEL SALAM

DEFINITIONS
Salam Purchase of a commodity for deferred delivery in exchange for immediate payment according to specified conditions or sale of a commodity for deferred delivery in exchange for immediate payment. Al-Muslam fihi The commodity to be delivered.

DEFINITIONS
Al-Muslam ileihi The seller Al-Muslam The purchaser Ras-almal Capital (cost) paid (in cash, kind or benefit) in a Salam contract i.e price.

DEFINITIONS
Parallel Salam A Salam contract whereby al-muslam ileihi depends, for executing his obligation, on receiving what is due to him-in his capacity as al-muslam-from a sale in a previous Salam contract, without making the execution of the second Salam contract dependent on the execution of the first one.

SALAM INITIAL RECOGNITION

Salam financing is recognized when the capital of Salam is paid to Seller or made available to him. Parallel Salam is recognized when the Bank receives the capital. Initial recognition is made at the amount of cash paid or at fair value of the asset, if capital is provided in kind.

SALAM DISCLOSURES AFTER INITIAL RECOGNITION

Salam financing transactions are presented as Salam Financing in financial statements. Parallel Salam transactions are presented as liability under the head Parallel Salam in the financial statements. Commodity received against Salam is recorded as an asset at historical cost.

SALAM ACCOUNTING TREATMENTS

SALAM Commodity having worth Rs. 12 M purchased at Rs. 11 M with deferred delivery of 1 month Rs. 1 M is the expected profit of the Bank PARALLEL SALAM Same Commodity sold at Rs. 11.5 M with deferred delivery of 1 month. Rs. 0.5 M is the expense of the Bank

Customer

Commodity

ISLAMIC BANK

Commodity

2nd Customer

Payment recorded as Salam Financing

Amount received recorded as Parallel Salam Liability

Difference between the Salam price and the Market price or the Parallel Salam price is recognised as Salam profit / expense

SALAM SUBSEQUENT MEASUREMENT

At the end of each financial period, the Salam financing and parallel Salam liability are measured same as in initial measurement. If the delivery of commodity is not probable in full or in part or its value will decline, the Islamic Bank will make provision of the amount of estimated deficit.

SALAM SUBSEQUENT MEASUREMENT

Commodity acquired through Salam shall be measured at lower of historical cost or cash equivalent value. If cash equivalent value is lower, the difference shall be recognized as loss in Income statement.

SALAM PROFIT AND LOSS DETERMINATION

Salam profit is recognised when the goods acquired under Salam are sold in the market. Note: A few scholars allow in case of certain banks that whenever the delivery is received, if it is expected that the commodity can be sold in profit, the profit may be spread over the period between delivery sale.

SALAM PROFIT AND LOSS DETERMINATION

Upon delivery of commodity in Parallel Salam transaction, difference of the amount paid by client and cost of commodity shall be recognized as profit or loss.

SALAM CHANGES IN QUANTITY, QUALITY OR PRICE OF COMMODITY

Receipt of commodity of different quality: If the market value is equal to the contracted value, commodity shall be recorded at book value. In case the market value is lower than the book value of contracted commodity, it shall be measured and recorded at market value at the time of delivery and difference shall be recognized as loss.

SALAM CHANGES IN QUANTITY, QUALITY OR PRICE OF COMMODITY

Failure to receive commodity on due date: If delivery is extended, the book value shall remain as it is. If Salam contract is cancelled and capital is not repaid the amount shall be recognized as a receivable due from the client.

SALAM CHANGES IN QUANTITY, QUALITY OR PRICE OF COMMODITY

Failure to receive commodity due to clients misconduct If Salam contract is cancelled and client does not repay the capital, the amount shall be recognized as a receivable due from the client. Securities pledged will be realized to recover the receivable and any excess will be refunded.

SALAM CHANGES IN QUANTITY, QUALITY OR PRICE OF COMMODITY

Receipt of commodity of different quality in Salam Salam Finance Rs. 5 M

Market value of commodity Rs. 5 M is Equal to contracted value Rs. 5 M Then Record at book value Rs. 5 M

Market value of commodity Rs. 4 M is not Equal to contracted value Rs. 5 M Then The difference of Rs. 1 M is loss

Failure to receive commodity on due date Amount Rs. 5 M shall be recognized as a receivable due from the client.

SAMPLE ACCOUNTING ENTRIES FOR SALAM

1 Advance paid to customer against Debit Credit Salam Advance against Salam (B/S Asset Side) 100 Cash / DD (B/S Liability Side) 2 Item received from the customer Purchases (P/L) / Inventory (B/S Asset Side) Advance against Salam (B/S) 3 Termination of Salam contract due to non delivery of item Receivable from customer (B/S) Advance against Salam (B/S) 100 100 100

100 100

SAMPLE ACCOUNTING ENTRIES FOR SALAM

4 Receipts of amount from customer against Parallel Salam Cash / DD (B/S Asset Side) Parallel Salam (B/S Liability Side) 5 Delivery of Item against Parallel Salam Parallel Salam (B/S Liability Side) Purchases (P/L) / Inventory (B/S Asset Side) Parallel Salam profit (P/L) Debit Credit 120 120

120 100 20

SAMPLE ACCOUNTING ENTRIES FOR SALAM

6 Revenue and Profit recognition (when Debit Credit goods are sold directly or by agent) Cash / Receivable (B/S) 120 Salam Sales (P/) (Diff. between Salam Purchase and Sales is the Profit) 7 Settlement of Receivable Early Termination Cash (B/S Asset Side) Receivable from customer (gross amount) (B/S Asset Side) 120

100 100