AAOIFI - Introduction: 2-How AAOIFI Standards Support Islamic Finance Industry

AAOIFI Introduction
1- 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 Sharia supervision),
- 2 codes of ethics, and
- 40 Sharia standards (rules for application of Sharia)
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 Sharia Adviser and Auditor (CSAA).
2- How AAOIFI Standards Support Islamic Finance Industry.

AAOIFI standards reflect concept and essence of Islamic finance transactions. And bring about
harmonisation of Islamic finance practices. Enhance confidence of users of Islamic finance
products. Promote growth of demand for Islamic finance. AAOIFI standards also ensure
convergence of financial reporting by IFIs. And introduce greater clarity to the financial reports of
IFIs. Promote better view of IFIs financial performances. Enhance transparency of IFIs financial
reports.
3- Comparison on structural objectives:

A. Differences on coverage of standards
AAOIFI
Specific for Islamic finance industry.

Based on requirement of Islamic finance practices.
IFRS
For entire economic and social activities.
Generic, mostly not industry-specific.
B. Differences on types of standards

AAOIFI
All-encompassing.
Accounting,
Sharia,
Auditing, Ethics, and Governance.
IFRS
Type-specific.
Accounting.
4- 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).
5- IFRS / IASB standards that can be adopted by IFIs
These standards do not give rise to Sharia 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
Investment account funds in IFIs
An IFIs major source of funds is unrestricted investment account funds from its customers.
These funds are generally managed by IFI based on Mudaraba investment management profitsharing agreement.
Under Mudaraba investment management, IFI is not liable for loss arising from investments
(except due to IFIs misconduct, negligence, etc) Sharia standard.
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).
Ijarah (leasing)
An IFIs 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.
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.
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.

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AAOIFI Introduction

1- AAOIFI is responsible for formulation and issuance of international Islamic finance

2- How AAOIFI Standards Support Islamic Finance Industry.

3- Comparison on structural objectives:

Specific for Islamic finance industry.

For entire economic and social activities.

Generic, mostly not industry-specific.

B. Differences on types of standards

4- Categories of accounting standards for IFIs:

5- IFRS / IASB standards that can be adopted by IFIs

Examples of main differences between AAOIFI and IFRS

Investment account funds in IFIs

AAOIFI standards require unrestricted investment account funds to be presented in

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