Exploring the Accounting Treatment of Ijarah - A Study of AAOIFI vs IFRS in Pakistan
Submission Type
Paper Presentation
Abstract/Description
This research paper explores the application of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standards and International Financial Reporting Standards (IFRS) by Islamic banks in Pakistan, with a specific focus on the accounting treatment of Ijarah transactions. Islamic banking prohibits interest under Shariah law and relies on asset-based financing, which requires unique accounting practices. Ijarah, a form of leasing considered Shariah-compliant, cannot be accounted for in the same way as conventional leases under IFRS. This creates a conflict in financial reporting for Islamic banks, especially when it comes to Islamic mortgages and leasing, as these institutions must navigate the challenge of complying with global accounting standards while maintaining Shariah compliance. AAOIFI was established to develop Shariah-compliant accounting standards that emphasize ethical finance, while IFRS, created by the International Accounting Standards Board (IASB), provides a globally recognized framework aimed at ensuring transparency and consistency across financial markets. However, IFRS lacks specific guidance on Shariah-compliant finance, which makes it difficult to apply these standards directly to Islamic banks. As a result, Islamic banks in Pakistan often adopt a dual-framework approach, using both IFRS and AAOIFI standards to maintain Shariah compliance—necessary for domestic credibility—while also adhering to global standards that enhance transparency and comparability. This dual approach not only helps Islamic banks meet the ethical and legal requirements of Shariah but also makes them more appealing to international investors, who seek consistent and transparent financial reporting.
Keywords
AAOIFI, IFRS, Ijarah, Islamic Finance, Accounting Treatment, Shariah Compliance
Location
Movenpick Hotel
Session Chair
Prof. Dr. Imam Uddin, Director Islamic Finance & Accounts, Institute of Business Management (IOBM)
Session Moderator
Dr. Azima Khan, Assistant Professor, Institute of Business Administration, Karachi
Start Date
4-12-2024 3:15 PM
End Date
4-12-2024 4:15 PM
Recommended Citation
Irfan, A., Siddiqua, A., Qadir, A., & Shakil, F. (2024). Exploring the Accounting Treatment of Ijarah - A Study of AAOIFI vs IFRS in Pakistan. IBA CEIF World Islamic Finance Forum (WIFF). Retrieved from https://ir.iba.edu.pk/wiff/2024/agenda/8
COinS
Exploring the Accounting Treatment of Ijarah - A Study of AAOIFI vs IFRS in Pakistan
Movenpick Hotel
This research paper explores the application of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standards and International Financial Reporting Standards (IFRS) by Islamic banks in Pakistan, with a specific focus on the accounting treatment of Ijarah transactions. Islamic banking prohibits interest under Shariah law and relies on asset-based financing, which requires unique accounting practices. Ijarah, a form of leasing considered Shariah-compliant, cannot be accounted for in the same way as conventional leases under IFRS. This creates a conflict in financial reporting for Islamic banks, especially when it comes to Islamic mortgages and leasing, as these institutions must navigate the challenge of complying with global accounting standards while maintaining Shariah compliance. AAOIFI was established to develop Shariah-compliant accounting standards that emphasize ethical finance, while IFRS, created by the International Accounting Standards Board (IASB), provides a globally recognized framework aimed at ensuring transparency and consistency across financial markets. However, IFRS lacks specific guidance on Shariah-compliant finance, which makes it difficult to apply these standards directly to Islamic banks. As a result, Islamic banks in Pakistan often adopt a dual-framework approach, using both IFRS and AAOIFI standards to maintain Shariah compliance—necessary for domestic credibility—while also adhering to global standards that enhance transparency and comparability. This dual approach not only helps Islamic banks meet the ethical and legal requirements of Shariah but also makes them more appealing to international investors, who seek consistent and transparent financial reporting.