The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Accounting Board (AAB) approved recently the issuance of its Financial Accounting Standard (FAS)  exposure draft No. (F2/2018) on “Ijarah”.

The objective of this standard is to set out principles for the classification, recognition, measurement, presentation and disclosure for Ijarah (asset Ijarah, including different forms of Ijarah Muntahia Bittamleek) transactions entered into by Islamic financial institutions (IFIs) on both ends of the transaction, i.e., as a lessor and lessee. IFIs are expected to consider the terms and conditions of contracts and all relevant facts and circumstances when applying this standard, and shall apply the same on a consistent basis. This standard once finalized will supercede the earlier FAS 8 (Ijarah and Ijarah Muntahia Bittamleek).

This standard brings a fundamental shift in the accounting approach for Ijarah transactions, particularly, in the hands of the lessee. In contrast to the earlier accounting approach of the off-balance sheet accounting for Ijarah, in the hands of the lessee, the new standard prescribes an altogether different model of accounting which entails recognition of the lessee’s unencumbered right to the benefits from the use of the asset as “right-of-use asset” and corresponding liability.

Mr. Hamad al-Oqab, Chairman, AAOIFI’s Accounting Board stated: “Ijarah and Ijarah Muntahia Bittamleek in its different forms are amongst the most popular Islamic finance transactions. These are used very commonly by Islamic financial institutions for providing assets to customers in need of financial resources in different sectors. A significant proportion of underlying assets in Sukuk structures are also based on such transactions. The new standard provides for accounting treatment taking into consideration global best practices and standards, all in line with relevant Shari’ah principles and rules.”

The public hearings for the exposure draft will be held in the upcoming months in different parts of the world – to obtain industry feedback. Further details with respect to dates and venues will be announced shortly via AAOIFI’s website. Comments on the exposure draft shall be directed – no later than 28 Febraury 2019- to accounting@aaoifi.com. All comments and suggestions of the public hearings as well as written comments will be presented to the AAB to discuss and make the changes it deems necessry.

The exposure draft can be accessed BY CLICKING HERE