The Accounting Board (AAB) of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has officially issued financial accounting standard (FAS) No. 35 “Risk Reserves”. This standard was finalized by AAB after extensive discussion, due to deliberations and with wide-ranging industry consultations which included inviting and evaluating industry and regulators comments through the public hearing events and also incorporating comments received in writing from industry experts.

Chairman of the Accounting Board of AAOIFI, Mr. Hamad Al-Oqab, stated that “the comprehensive project for revision of FAS 11 “Provisions and Reserves” in line with improved global accounting, financial reporting, and regulatory requirements included a futuristic approach for dealing with credit losses. This resulted in the development of two different standards. The first was FAS 30 “Impairment, Credit Losses, and Onerous Commitments” already finalized and issued. The second part of the project specifically needed to define and improve the scope and accounting treatments associated with proper risk management practices. This has been concluded with the issuance of this standard FAS 35 “Risk Reserves” covering the financial reporting and accounting for risk reserves.”

The standard defines the accounting principles for risk reserves in line with the best practices of financial reporting and risk management. The standard encourages maintaining adequate risk reserves to safeguarding the interest of profit and loss stakeholders particularly against various risks including credit, market, equity investment risks, as well as, the rate of return risk including displaces commercial risk. This is expected to provide better stability to the Islamic finance industry in line with the best practices.

This standard does not mandatorily require to maintain risk reserves, however, it is applicable to any such reserves, by whichever name referred to by the institution, if they meet the definition of any of reserves covered by the standard.

This standard together with FAS 30 “Impairment, Credit Losses and Onerous Commitments” supersede the earlier FAS 11 “Provisions and Reserves” and shall be effective for the financial periods beginning on or after 1 January 2021 with earlier adoption permitted.

The issued standard can be accessed exclusively by CLICKING HERE