International Standards

for Islamic Finance

May 2009
Content
AAOIFI – Introduction
AAOIFI Accounting Standards and IFRS
Adoption of AAOIFI Standards
How AAOIFI Standards Support Islamic
Finance Industry
AAOIFI – Introduction
AAOIFI – Introduction
• AAOIFI is responsible for formulation and issuance of
international Islamic finance standards.
• AAOIFI has issued 80 standards:
- 26 accounting standards,
- 5 auditing standards,
- 7 governance standards (incl. on Shari’a supervision),
- 2 codes of ethics, and
- 40 Shari’a standards (rules for application of Shari’a).

• In addition, AAOIFI is developing a number of new

standards and reviewing existing standards.
AAOIFI – Introduction (continued)
• AAOIFI, based in Bahrain, is supported by over 200
institutional members from over 40 countries.
Members include:
- Central banks and regulatory authorities,
- Islamic and conventional financial institutions,
- Accounting and auditing professions, and
- Islamic financial support services providers.
• So as to support technical application of standards,
AAOIFI offers professional qualification programs:
- Certified Islamic Professional Accountants (CIPA),
- Certified Shari’a Adviser and Auditor (CSAA).
AAOIFI – Introduction (continued)
• AAOIFI has also introduced Contract Certification
Program – to certify that financial contracts
between Islamic financial institutions and their
clients are in compliance with AAOIFI standards and
Shari’a rules and principles.
• The Contract Certification Program is designed to:
- Promote greater harmonisation of international
Islamic finance practices,
- Provide independent endorsement for Islamic
financial institutions, and
- Give further support on application of our
standards.
AAOIFI Accounting Standards and
IFRS

• Comparison on structural objectives

• Categories of accounting standards for Islamic
financial institutions
• Examples of main differences between AAOIFI
Standards and IFRS
Comparison on structural objectives

A. Differences on coverage of standards …

AAOIFI IFRS

• Specific for Islamic • For entire economic and

finance industry. social activities.
• Based on requirement of • Generic, mostly not
Islamic finance practices. industry-specific.
Comparison on structural objectives

B. Differences on types of standards …

AAOIFI IFRS

• All-encompassing. • Type-specific.
• Accounting, • Accounting.
• Shari’a,
• Auditing, Ethics, and
Governance.
Categories of accounting standards for IFIs
1. AAOIFI standards issued because IFRS / IASB
standards cannot be adopted in whole by Islamic
financial institutions (IFIs).

2. AAOIFI standards issued for specific Islamic

banking and finance practices not covered by IFRS /
IASB standards.

3. IFRS / IASB standards that can be adopted by IFIs

(therefore AAOIFI does not issue similar ones and
allows adoption of those standards).
Categories of accounting standards for IFIs
1. AAOIFI standards issued because IFRS / IASB
standards cannot be adopted in whole by IFIs
• Due to Shari’a compliance issues or because IFRS / IASB
standards do not fully cover characteristics of Islamic
banking and finance.
• In these cases, AAOIFI standards are issued to apply to
topics covered by the IFRS / IASB standards.
• Eg.: AAOIFI’s FAS 1 (General Presentation and
Disclosure in Financial Statements of IFIs) covers IAS 1
(Presentation), 7 (Cash Flow), 18 (Revenue), etc.
Categories of accounting standards for IFIs

2. AAOIFI standards issued for specific Islamic banking

and finance practices not covered by IFRS / IASB
standards
• For financial transactions and practices unique to Islamic
banking and finance.
• In these cases, AAOIFI standards are issued to apply to
topics not covered by IFRS / IASB standards.
• Eg.: AAOIFI’s FAS 2 (Murabaha & Murabaha to the
Purchase Orderer), FAS 7 (Salam & Parallel Salam).
Categories of acct’g standards for IFIs

3. IFRS / IASB standards that can be adopted by IFIs

• These standards do not give rise to Shari’a compliance
issues and are adequate to cover practices of IFIs. In
these cases, AAOIFI does not issue equivalent standards
• IFIs adopting AAOIFI standards are allowed to also follow
other standards if there are no equivalent AAOIFI
standards.
• Eg.: IAS 10 (Events after Balance Sheet Dates), IAS 24
(Related Party Disclosures).
Examples of main differences between AAOIFI
and IFRS
a. Investment account funds in IFIs
• An IFI’s major source of funds is ‘unrestricted’
investment account funds from its customers.
• These funds are generally managed by IFI based on
Mudaraba investment management profit-sharing
agreement.
• Under Mudaraba investment management, IFI is not
liable for loss arising from investments (except due to
IFI’s misconduct, negligence, etc) – Shari’a standard.
Examples of main differences between AAOIFI
and IFRS

a. Investment account funds in IFIs (continued)

• AAOIFI standards require ‘unrestricted’ investment

account funds to be presented in statement of financial
position as a separate item between liabilities and
owners’ equity.

• In contrast, based on IFRS these would be presented as

liabilities (along with other deposits).
Examples of main differences between AAOIFI
and IFRS
b. Ijarah (leasing)
• An IFI’s major financing mechanisms are Operating
Ijarah and Ijarah Muntahia Bittamleek (leasing that ends
with transfer of asset ownership to lessee).
• For both, asset ownership rests with IFI throughout the
lease term.

• In Ijarah Muntahia Bittamleek, there must be

independent contract for transfer of asset ownership.
Examples of main differences between AAOIFI
and IFRS
b. Ijarah (leasing) (continued)
• AAOIFI standards require both Operating Ijarah and
Ijarah Muntahia Bittamleek to be treated similar to
Operating Lease.
• In contrast, based on IFRS, both Operating Ijarah
(especially if lease term is for major part of economic life
of lease asset) and Ijarah Muntahia Bittamleek (due to
the transfer of asset ownership by the end of lease term)
would normally be classified and treated as Finance
Lease.
Adoption of AAOIFI Standards
Adoption of AAOIFI Standards
• AAOIFI standards are mandatory in 9 jurisdictions (and
supra-national entity):
- Bahrain
- Dubai International Financial Centre,
- Jordan,
- Qatar,
- Qatar Financial Centre,
- Sudan,
- South Africa (for investment management),
- Syria, and
- Islamic Development Bank Group.
Adoption of AAOIFI Standards (continued)
• AAOIFI standards are also adopted as guidelines or
basis for national standards in jurisdictions incl.:
- Brunei,
- Indonesia,
- Kuwait
- Lebanon,
- Malaysia,
- Pakistan,
- Saudi Arabia, and
- United Arab Emirates.
• Overall, AAOIFI standards are used by all IFIs across the
world.
How AAOIFI Standards
Support Islamic Finance
Industry
How AAOIFI Standards Support Islamic Finance
Industry

AAOIFI standards reflect Enhance

concept and essence of confidence of
Islamic finance transactions. users of Islamic
finance products.

And bring about Promote growth

harmonisation of Islamic of demand for
finance practices. Islamic finance.
How AAOIFI Standards Support Islamic Finance
Industry

AAOIFI standards also Promote better

ensure convergence of view of IFIs’
financial reporting by IFIs. financial
performances.

And introduce greater Enhance

clarity to the financial transparency of
reports of IFIs. IFIs’ financial
reports.
Thank You

www.aaoifi.com