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AAOIFI issues new accounting standard on investment accounts

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued a new accounting standard on investment accounts – Financial Accounting Standard No. 27 (FAS 27) Investment Accounts.

The new FAS 27 updates and replaces two of AAOIFI’s previous accounting standards relating to investment accounts – FAS 5 Disclosure of Bases for Profit Allocation between Owners’ Equity and Investment Account Holders as well as FAS 6 Equity of Investment Account Holders and Their Equivalent.

This standard applies to investment accounts based on Mudaraba contracts which represent “equity of investment account holders and on Mudaraba contracts that are placed on “short term basis” (overnight, seven days, one month basis) by other financial institutions as “interbank-bank deposits” for the purpose of liquidity management. However, it is not applicable to own equity instruments, wakala contracts, reverse murabaha, musharaka or sukuk.

Dr Hamed Hassan Merah, Secretary General of AAOIFI said that the new standard was developed through extensive consultation with the international Islamic finance industry. The standards development process (the due process) was carried out through up to thirteen stages, commencing with the commissioning of consultants who prepared the exposure drafts and concluding with the official inssuance and publication. One of the essential stages is the public hearing which is designed to gather and gauge the opinions and views of experts and practitioners from the broader Islamic finance industry.

He added, “AAOIFI is currently working on revision of a number of existing standards and developing new ones in order to give better support to the industry.”

The new standard will be included in the next publication of AAOIFI standards scheduled for early 2015.