AAOIFI Issues its (101) Standard on ‘Impairment, Credit Losses and Onerous Commitments’

AAOIFI’s Accounting Board (AAB) has issued its Financial Accounting Standard (FAS) No. 30 “Impairment, Credit Losses and Onerous Commitments”. This standard has been finalized by the AAB after extensive discussion, due deliberations and extensive industry consultations in form of a workshop, public hearing and inviting and evaluating industry and regulators’ comments received in writing.


“By issuance of this standard, we are demonstrating our commitment to the industry and regulators that AAOIFI will make all endeavors to improve the accounting and financial reporting principles for Islamic financial institutions in line with the global best practices and Shari’ah and specific charecteristics of Islamic finance transaction”, said  H.E. Mr. Hamad Al-Oqab, Chairman of AAB.


The aftermath of the financial crisis in 2008 prompted a more timely recognition of expected credit losses and a forward looking impairment model globally. AAOIFI in response and taking into account the ever-changing requirements of the Islamic finance industry, specifically aims at setting out the accounting rules and principles for impairment and credit losses. The standard is aimed to cover current and expected losses, including provisions needed against any anticipated losses on onerous commitments. FAS shall apply to all Islamic financing, investment and certain other assets held by Islamic financial institutions.


The Board decided that the approach for applying the impairment and credit losses to various assets and balances shall be based on different categories according to their nature. It was concluded that the impairment and credit losses approaches taken by the generally accepted accounting principles recently set by various accounting standard setters and regulatory standard setters, as well as, the regulators, cannot be applicable on Islamic finance transactions in a similar manner. However, the outcome of this standard is aligned in similar to the generally accepted accounting principles. This standard, along FAS 35 “Risk Reserves” (will be issued shortly), supersedes the earlier FAS 11 “Provisions and Reserves”.


This standard sets out the classification of assets and exposures in view of credit risk and other risks involved. The idea is to apply the forward looking approach in line with other standard setters for the assets and instruments that are financial instruments from Shari’ah perspective. It also defines other globally acceptable impairment and write down and provisioning approaches for other assets and exposures, without compromising on Shari’ah. It further covers situations where onerous commitments exists which mandate a provision for anticipated losses on the same.

This standard provides the related accounting treatments for the credit losses approach, impairment approach and net realizable value approach including provisions for onerous contract or commitment to acquire an asset.

This standard shall be effective from the financial periods beginning on or after 1 January 2020. Earlier adoption is permitted.

The issued standard can be accessed exclusively by the digital version (of AAOIFI standards) subscribers, and free subscription can be attained, on the AAOIFI website: www.aaoifi.com

error: Copyrights AAOIFI