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Conceptual Framework for Financial Reporting by Islamic Financial Institutions

13 Aug 2010

The Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) has issued two new accounting standards, one of which is a conceptual framework for financial reporting by Islamic financial institutions.

The AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the industry. It was founded in 1991 and has so far issued a total of 42 standards covering the areas of accounting, auditing, ethics, and governance for Islamic financial institutions (an English 2010 edition of the standards is available via the AAOIFI website).

Accounting Standards for financial reporting by Islamic financial institutions have to be developed because in some cases Islamic financial institutions encounter accounting problems because the existing accounting standards such as IFRSs or local GAAP were developed based on conventional institutions, conventional product structures or practices, and may be perceived to be insufficient to account for and report Islamic financial transactions. Shariah compliant transactions that observe the prohibition to charge interest may not have parallels in conventional financing and therefore, there may be significant accounting implications.

The current approach to developing financial standards for Islamic transactions is to benchmark against international standards such as IFRSs to ensure consistency with globally accepted standards and modifying them, where necessary, in order to ensure financial statements present fairly the financial position, financial performance and cash flows of the Islamic financial institution.

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