The Accounting Board (AAB) of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has officially published the exposure draft of AAOIFI’s accounting standard on “Risk Reserves” and has sought opinion and feedback from the Islamic finance industry.

The standard intends to define the accounting principles for risk reserves maintained for the benefit of participatory stakeholders like investment account holders and Sukuk-holders etc. to encourage a financial reporting environment which is risk averse and transparent on one end, while ensures better safeguarding of the interest of such stakeholders and providing better stability to the Islamic finance industry in line with the best practices of accounting, financial reporting and risk management and reporting. This standard together with FAS 30 “Impairment, Credit Losses and Onerous Commitments” supersede the earlier FAS 11 “Provisions and Reserves’.

The proposed draft standard provides better guidance on the accounting and financial reporting in the area and correlates the accounting with the new approach for accounting to be integrated with the allowances for impairment and credit losses (with futuristic approach) and provision against onerous commitments. It encourages maintaining adequate risk reserves to safeguard the interest of stakeholders, mainly the participatory investors of Islamic financial institutions against various risks including credit, market, equity investment risks (insofar as not already taken care of by the allowances and provisions under FAS 30), as well as, the rate of return risk (including displaces commercial risk).

The AAOIFI public hearings will be held in the upcoming months in different parts of the world. This is to obtain industry feedback on the exposure draft in addition to the comments received in writing. Further details with respect to dates and venues, will be announced shortly. Comments on the exposure draft are welcome and should be directed no later than 15 January 2018 to this email: accounting@aaoifi.com. All comments and suggestions of the public hearings are presented to AAB to discuss and to make necessary changes required.

The exposure draft can be accessed by CLICKING HERE