Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued two new accounting standards and one new accounting guidance note.
Issuance of the new accounting standards and guidance note was approved by AAOIFI Accounting and Auditing Standards Board at its meeting in Dubai.
The meeting was hosted by Dubai Financial Services Authority, the regulatory authority for financial services in Dubai International Financial Centre.
The new accounting standards are on conceptual framework for financial reporting by Islamic financial institutions and investments in sukuk, shares and similar instruments while the new accounting guidance note is on first-time adoption of AAOIFI accounting standards.
Apart from laying down principles of financial reporting for Islamic financial institutions and providing the basis for AAOIFI accounting standards, the new conceptual framework also gives updated guidance on accounting treatment for investment accounts.
It introduces the concept of authority over investment decisions to guide financial reporting for investment accounts, which are funds received by Islamic financial institutions from their investors on mudaraba or investment management arrangement.
Under the new accounting standard on investments in sukuk, shares and similar instruments, Islamic financial institutions are required to segregate their investments between debt-type and equity-type instruments.
The segregation depends on characteristics of the investment instruments and purposes of the investments.
Accounting treatments and disclosures that Islamic financial institutions have to carry out are to be based on this segregation.
The new accounting guidance note on first-time adoption of AAOIFI Accounting Standards provides Islamic financial institutions with the starting point for preparing financial accounting records and reports based on AAOIFI standards.
Islamic financial institutions that are adopting AAOIFI accounting standards for the first time are required to follow rules set out in the guidance note.
The new accounting standards and guidance note were developed in consultation with more than 200 AAOIFI institutional members from over 45 countries as well as other key industry stakeholders," said AAOIFI secretary-general Dr Mohamad Nedal Alchaar.
"AAOIFI accounting standards ensure that Islamic financial institutions are transparent with their financial performances and consequently enhance the credibility of the international Islamic finance industry," he added.
AAOIFI is currently developing revised accounting standards on investments in real estate, equity of investment account holders and takaful.
In addition, it is also formulating a new standard on governance for Sharia supervisory board that will regulate the conduct of Sharia scholars serving on Islamic financial institutions” Sharia supervisory boards.
The new governance standard will address concerns including on the number of Sharia supervisory boards that a Sharia scholar can effectively serve, whether Sharia scholars can have shareholdings in Islamic financial institutions that they serve, and potential governance issues relating to Sharia advisory services given to Islamic financial institutions by commercial entities that are owned by Sharia scholars.