Application of IFRS 15 to permitted Islamic finance transactions

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16 Jan 2015

At the upcoming meeting of the Joint Transition Resource Group for Revenue Recognition (TRG), participants will discuss the implications of IFRS 15 for certain instruments common in the Islamic financial industry.

As Islamic financial instruments do not include interest on loans (riba), an Islamic Financial Institution (IFI) must legally possess the underlying assets, even for very short time, with all risks and rewards incidental to ownership before it can resell or lease the underlying assets. The question in connection with the new requirements on revenue recognition is whether deferred-payment transactions have to first pass through IFRS 15 Revenue from Contracts with Customers before being reported under IFRS 9 Financial Instruments.

The agenda paper prepared for the TRG meeting sets out arguments for and against such contracts being within the scope of IFRS 15 or whether they warrant specific treatment. The different paragraphs supporting each view are cited.

The idea behind the submission is not to determine whether particular transactions are Shariah compliant but to prevent possible diversity in practice and to address the concern that IFIs might incur significant costs to analyse the possible application of the standard. To this end the IASB's Consultative Group for Shariah-Compliant Instruments and Transactions asks for a timely communication to the marketplace of the applicability of IFRS 15 in this case.

Please click for access to the meeting paper on the IASB's website.

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