AAOIFI Issues FAS 33 “Investments in Sukuk, Shares and Similar Instruments” and FAS 34 “Financial Reporting for Sukuk-holders”

The Accounting Board (AAB) of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has officially issued financial accounting standard (FAS) 33 “Investments in Sukuk, Shares and Similar Instruments” and FAS 34 “Financial Reporting for Sukuk-holders”. This brings the total number of standards and pronouncements that have been developed in all areas of standards development by AAOIFI and are in issue to 111.

FAS 33 (which supersedes earlier FAS 25) sets out the improved principles for classification, recognition, measurement, presentation and disclosure of investment in Sukuk, shares and other similar instruments of investments made by Islamic financial institutions (IFIs / the institutions), in line with Shari’ah principles. It defines the key types of instruments of Shari’ah compliant investments and defines the primary accounting treatments commensurate to the characteristics and business model of the institution under which the investments are made, managed and held.

FAS 34 aims to establish the principles of accounting and financial reporting for assets and businesses underlying the Sukuk to ensure transparent and fair reporting to all relevant stakeholders, particularly including Sukuk-holders.

It is worthwhile to note that presently there is no financial reporting requirement for the stakeholders and as a consequence, the transparency which is fundamental to the Islamic finance transactions is jeopardized. The standard emphasizes on financial reporting for the benefit of Sukuk-holders’ and their underlying assets as a key requirement, in a manner that guarantees a transparent and fair financial information sharing. At the same time the standard does not require comprehensive financial statements for the same and accordingly allows a simplified version of financial reporting for different types of Sukuk structures.

The newly issued standards were finalized by AAB after extensive discussions and deliberations and as well as wide-ranging industry consultations which included inviting and evaluating the comments received from the industry and regulators through the public hearing events held for that purpose. This also encompassed comments received in writing from the industry experts and practitioners.

Mr. Hamad Al-Oqab, Chairman of the Accounting Board, stated “this is the first time that AAOIFI has ever issued any specific standard focused on Sukuk-holders’ information needs. Currently, there are no well established practices of financial reporting to the Sukuk-holders or for accounting for the Special Purpose Vehicles (SPVs) in the industry. The Board noted through various market interactions and expert discussions during the comprehensive Sukuk project that there is a need for improved transparency and financial reporting practices for sukuk-holders. I hope that this standard will help to fill this gap by fulfilling the information needs of the Sukuk-holders and increase transparency and Shari’ah compliance in this imporant area”. He further added that “there was a need to improve FAS 25 from Shari’ah perspective, as well as, to bring it closer to the accounting best practices. I am happy that the revised FAS 33 serves both of these purposes very well.”

These two standards shall be effective from the financial periods beginning on or after 1 January 2020 with earlier adoption being permitted.

The standards can be accessed by CLICKING HERE