Islamic Finance Body AAOIFI To Revise Four Standards, Eyes Sukuk

The Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) will revise four of its standards in the first half of next year while expanding its guidance for Islamic bonds, the industry body said.

Earlier this month, AAOIFI issued two new standards and revised three others as it takes a more proactive approach under its new secretary general, Hamed Hassan Merah.

AAOIFI held its annual conference this week, after which it said it would seek either to revise or supplement its existing standard for sukuk, to provide the industry with more extensive guidance.

“We are…looking at the possibility of developing clearer guidance on sukuk that will incorporate accounting, legal, technical and tax-related aspects,” Merah said in a statement.

Sukuk issuance is increasing worldwide but the structures used to create the instruments aren’t uniform, which limits their cross-border acceptance by investors and trading in the secondary markets.

Year-to-date, sukuk issuance totals $110.9 billion through 665 deals globally, up from $97.3 billion through 703 deals a year earlier, according to Zawya, a Thomson Reuters company. AAOIFI is also revising its accounting standards covering investment accounts, takaful (Islamic insurance), and ijara and murabaha financing structures.

A revised investment accounts standard is to be released by the end of 2014, important for Islamic banks which are seeking greater clarity on how to classify their deposits. Consultations on takaful, ijara and murabaha will be conducted in the first half of 2015, AAOIFI said.

On takaful, AAOIFI is considering how to extend its guidance to retakaful, the issue of fixing agency fees rather than linking the fees to profits or performance, and clarifying the definition of benevolent loans (qard hassan), a conference document showed.

For ijara, a sale and lease-back contract, AAOIFI wants to clarify distinctions between operating and financing leases. Industry practice is currently not aligned with the ijara standard, known as FAS 8; proposed changes would cover income recognition, balance sheet classification, depreciation, amortisation and disclosures, according to a separate conference document.

AAOIFI’s murabaha standard will be redesigned to stipulate the use of collateral for the recovery of receivables, while specifying accounting treatment and disclosure requirements, a third document showed. The body is also engaging its counterpart in conventional finance, the London-based International Accounting Standards Board; AAOIFI invited IASB officials to its annual conference in Manama.

An IASB official said on the sidelines of the conference that his organisation would seek to develop non-binding guidance on the interpretation of their standards by Islamic financial firms, to help reduce uncertainty in the marketplace.

Originally published on www.reuters.com