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Leases

Date recorded:

Islamic (Shariah-compliant) leases

As part of its continuing deliberations surrounding the Leases ED, the Boards discussed lessor issues in Islamic, or Shariah-compliant, leases.

The Director of International Activities of the IASB summarised to the Boards that Islamic accounting standards are less accepting of the concepts of time value of money and recognition of interest in a financing environment. Likewise, in lease transactions in which a transfer of ownership of the underlying asset exists at the end of the lease term, Islamic accounting standards generally mandate that the right-of-use and ultimate transfer of ownership be accounted for as separate transactions even if the two transactions are arranged in conjunction with each other (i.e., closely related). As a result, Islamic law generally treats all leases as operating leases assuming Shariah-compliance (i.e., financing or capital leases are not generally recognised in Shariah-compliant financial statements). As a result, the Director of International Activities of the IASB posed the question to the Boards as to whether it is appropriate to consider this environment in contemplation of the lessor accounting model.

In initial deliberations, it was noted that Islamic leases, as currently presented in the financial statements of Shariah-compliant institutions, may be in conflict with current principles in paragraph 36 of IAS 17 Leases, which outlines requirements for arrangements to be treated as finance leases (it was noted that Shariah-compliant institutions have considered legislation by local or national standard setters in preparation of financial statements as opposed to specific IFRSs as issued by the IASB). As such, the Boards considered whether current lease accounting deliberations for the lease project would cause unique practice issues which have not existed in the past. On deliberation, it was noted that current deliberations would not be expected to yield unique issues from current guidance.

Given the difficulty in addressing unique theological or social issues such as these, and considering that current lease project deliberations are not expected to yield additional issues from that which are evident in current practice (to which Shariah-compliant institutions have been able to "resolve" through local standard setters), the Boards noted that the above findings would not result in any change in the tentative decisions reached to date on the leases project.

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