AAOIFI Issues Exposure Draft on Financial Accounting Standard (FAS) on “Wa’ad, Khiyar and Tahawwut” and Invites Opinion from Islamic Finance Industry

The AAB in its 12th meeting held in Bahrain on 29-30 of November 2018 approved the  issuance  of  exposure draft (Exposure draft No. F3/2018) “Wa’ad, Khiyar and Tahawwut” for the industry feedback and comments.

This new standard aims at setting out the accounting rules for measurement, recognition and disclosure of Wa’ad (promise), Khiyar (option) and Tahawwut (hedging) transactions that are carried out by Islamic banks and the Islamic financial institutions (IFI).

The standard reflects the different types of  Wa’ad and Khiyar which are mainly classified in to two types – Ancillary Wa’ad or Khiyar and Product Wa’ad or Khiyar. Ancillary Wa’ad or Khiyar would generally not require to be accounted for separately from the product to which they are ancillary. However, product Wa’ad or Khiyar like foreign exchange future promises shall be subject to accounting under this standard.

The stndard propose that an IFI may designate a Tahawwut (hedging) relationship between a Wa’ad or Khiyar (referred to as a hedging instrument) and a hedged item where Tahawwut relationship exists. Further guidance on accounting for Tahawwut relationship criteria are provided. The standard attempts to capture the current market practices and different forms entered into by the IFI.

The Chairman of the AAOIFI Accounting Board, Mr. Hamad Al-Oqab, stated that “ the AAB included the Wa’ad and Khiyar project in its work strategy because promises are an integral part of many Shari’ah compliant products. The Board was clear that guidance is required to ensure that accounting treatment of Wa’ad and Khiyar are similar and comparable between jurisdictions and entities. He further added that, “the standard also prescribes treatment of Tahawwut arrangements that are now increasingly gaining popularity due to acceptance of elaborate risk management strategies by IFIs.”

This new standard aims to bring the overall accounting and financial reporting approach closer to the global good practices and certain specific aspects have been addressed for the first time. Additionally, it is believed that this standard will bring greater conformity to Shari’ah requirements and to financial reporting.

The public hearings for the standard will be held in the upcoming months of 2019 in different parts of the world – to obtain industry feedback on the exposure draft in addition to comments in writing.

Further details with respect to dates and venues, will be announced shortly via the AAOIFI website. Comments on the exposure draft are welcome and should be directed no later than 28 February 2019 to [email protected]. All comments and suggestions of the public hearings and written comments are presented to AAB to discuss and to make necessary changes required.

The exposure draft can be accessed BY CLICKING HERE