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

This document is currently not available here.

Share

COinS
 
Dec 4th, 3:15 PM Dec 4th, 4:15 PM

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.