BANK RAKYAT SCHOOL OF BUSINESS AND

ENTREPRENEURSHIP

RZB4213

ISLAMIC ACCOUNTING PRACTICES

ACCOUNTING AND AUDITING ORGANISATION FOR ISLAMIC

FINANCIAL INSTITUTIONS (AAOIFI)

BY:

MOHAMED NOORULLAH BIN YUSUF IBRAHIM

KLC1160027
Significance of the establishment of AAOIFI

A not-for-profit organization that was established to maintain and promote Shariah standards for
Islamic financial institutions, participants and the overall industry. The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) was created on February 26, 1990 to
ensure that participants conform to the regulations set out in Islamic finance.

The founding and associate members, as well as the regulatory and supervisory authorities of the
AAOIFI, define the acceptable standards for various functions. This includes areas such as
accounting, governance, ethics, transactions and investment.

The objectives of AAOIFI

1. to develop accounting and auditing thoughts relevant to Islamic financial institutions.

2. to disseminate accounting and auditing thoughts relevant to Islamic financial institutions
and its applications through training, seminars, publication of periodical newsletters,
carrying out and commissioning of research and other means.
3. to prepare, promulgate and interpret accounting and auditing standards for Islamic
financial institutions.
4. to review and amend accounting and auditing standards for Islamic financial institutions.

AAOIFI carries out these objectives in accordance with the precepts of Islamic Shari’a which
represents a comprehensive system for all aspects of life, in conformity with the environment in
which Islamic financial institutions have developed. This activity is intended both to enhance the
confidence of users of the financial statements of Islamic financial institutions in the information
that is produced about these institutions, and to encourage these users to invest or deposit their
funds in Islamic financial institutions and to use their services.

Stakeholder of AAOIFI

Membership criteria vary among institutions- joined or willing to join AAOIFI.

However, founding members stand apart, being the Islamic financial institutions which are
signatories to the agreement establishing the organization in 1989. Those members are: the
Islamic Development Bank (Saudi Arabia) www.isdb.org, Al Baraka Banking Group- ABG-
(Bahrain) www.abg.bh, Dar Al Mal Al Islami (Switzerland), Al Rajhi Banking and Investment
Corporation (Saudi Arabia), Kuwait Finance House (Kuwait) www.kfh.com and Bukhari Capital
(Malaysia).

Associate members are those Islamic financial institutions and companies that comply with
Islamic Shari'a precepts and principles in their operations and transactions. In addition, Islamic
Fiqh academies and institutions that have corporate entities have their say in this class.

AAOIFI's membership base is not limited to founding and associate members. Members
representing regulatory and supervisory authorities - central banks, monetary agencies, and
suchlike- form a distinct category, playing vital role by supervising Islamic financial institutions
and their contribution towards the economy at large.
The last class of membership is observer members. Those members include organizations and
associations responsible for regulating the accounting and auditing profession and/or those
responsible for preparing accounting and auditing standards. Practicing certified accounting and
auditing firms that have interest in the accounting and auditing practices of Islamic financial
institutions are among observers as well. The list goes further by admitting financial institutions
engaged in financial activities of Islamic financial institutions (Islamic banking windows, for
instance). Users of financial statements of Islamic financial institutions- both individuals and
corporate- belong to the category, as well, and their observing role can't be underestimated.

Supporting members, finally, comprise of users of financial statements of Islamic financial

institutions- individuals and corporate, in addition to local and international financial institutions
that already have or intend to have relations with Islamic financial institutions' products.

There are more than 200 members in aaoifi , the Malaysian members in AAOIFI are:

 Bank islam Malaysia berhad

 Bank muamalat
 Hong Leong Islamic Bank
 Malaysian Accounting Standards Board
 Malaysian Rating Corporation Berhad
 Microlink Solutions berhad
 Syarikat Takaful Malaysia Berhad

Office Bearers

Accounting and Auditing Organisation of Islamic financial insinuation based on Bahrain and it
located at kingdom of Bahrain.

Headquarters:

Block 304, Al Muthana Road, Yateem Center,

Building 71, 4th floor, Office 403
Manama P.O.Box: 1176, Manama, Kingdom of Bahrain
Tel.: +973 17 244496
Fax: +973 17 250194

5.Products and services

AAOIFI Standards

Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is an

independent industry body dedicated to the development of international standards applicable for
Islamic financial institutions. The Bahrain-based organisation started producing standards as
early as 1993.
AAOIFI standards have been developed in consultation with leading Sharia scholars, with
several counties adopting them. Although AAOIFI standards are not binding on members, over
the last few years the organisation has made significant progress in encouraging the widespread
adoption of the standards.
Countries where AAOIFI standards are either mandatory or recommended include: Bahrain,
Malaysia, UAE, Saudi Arabia, Lebanon, Syria, Sudan and Jordan. Prior to implementation of
AAOIFI standards many financial institutions in these countries were operating under a “semi-
regulated market” (Al Baluchi, 2006), where accounting policies were determined with the
assistance of the bank’s Sharia Supervisory Board (SSB). In addition, over this period,
International Accounting Standards (IAS) or respective national accounting standards were
followed by Islamic banks. Hence, the unique requirements of Islamic financial institutions were
not being met. To give two examples:
a) Fiduciary risk: the Mudaraba contract places liability of the loss on the mudarib.
b) Displaced commercial risk: where Islamic banks “smooth” the returns Investment
Account Holders (IAH) by varying the percentage of profit taken as Mudarib share.
As a result, with the support of banking authorities, AAOIFI standards were created. In an
industry that is often quite fragmented, it is hoped that the development of AAOIFI standards
will go a long way in promoting convergence in Sharia standards and leading to further growth
in this nascent market.
AAOIFI Standards – The following standards have been developed by AAOIFI:
AAOIFI Accounting Standards:
1. Objective of financial accounting for Islamic banks and financial institution (IFIs).
2. Concept of financial accounting for IFIs.
3. General presentation and disclosure in the financial statements of IFIs.
4. Murabaha and Murabaha to the purchase orderer.
5. Mudaraba financing.
6. Musharaka financing.
7. Disclosure of bases for profit allocation between owners’ equity and investment account
holders.
8. Equity of investment account holders and their equivalent.
9. Salam and Parallel Salam.
10. Ijarah and Ijarah Muntahia Bittamleek.
11. Zakah.
12. Istisna’a and Parallel Istisna’a.
13. Provisions and Reserves.
14. General Presentation and Disclosure in the Financial Statements of Islamic Insurance
Companies.
15. Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance
Companies.
16. Investment Funds.
17. Provisions and Reserves in Islamic Insurance Companies.
18. Foreign Currency Transactions and Foreign Operation.
19. Investments.
20. Islamic Financial Services Offered by Conventional Financial Institutions.
21. Contributions in Islamic Insurance Companies.
22. Deferred Payment Sale .
23. Disclosure on Transfer of Assets.
24. Segment Reporting.
25. Consolidation.
26. Investment in Associates.

AAOIFI Auditing Standards:

1. Objective and principles of auditing.
2. The Auditor’s Report.
3. Terms of Audit Engagement.
4. Testing for Compliance with Shariaa Rules and Principles by an External Auditor.
5. The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements.

AAOIFI Governance Standards:

1. Sharia Supervisory Board: Appointment, Composition and Report.
2. Sharia Review.
3. Internal Sharia Review.
4. Audit and Governance Committee for IFIs.
5. Independence of Sharia Supervisory Board.
6. Statement on Governance Principles for IFIs.
7. Corporate Social Responsibility.
AAOIFI Ethics Standards:
1. Code of ethics for accountants and auditors of IFIs.
2. Code of ethics for employees of IFIs.
AAOIFI Sharia Standards:
1. Trading in currencies.
2. Debit Card, Charge Card and Credit Card
3. Default in Payment by a Debtor.
4. Settlement of Debt by Set-Off.
5. Guarantees.
6. Conversion of a Conventional Bank to an Islamic Bank.
7. Hawala.
8. Murabaha to the Purchase Orderer.
9. Ijarah and Ijarah Muntahia Bittamleek.
10. Salam and Parallel Salam.
11. Istisna’a and Parallel Istisna’a.
12. Sharika (Musharaka) and Modern Corporations.
13. Mudaraba.
14. Documentary Credit.
15. Jua’la.
16. Commercial Papers.
17. Investment Sukuk.
18. Possession (Qabd).
19. Loan (Qard).
20. Commodities in Organised Markets.
21. Financial Papers (Shares and Bonds).
22. Concession Contracts.
23. Agency.
24. Syndicated Financing.
25. Combination of Contracts.
26. Islamic Insurance.
27. Indices.
28. Banking Services.
29. Ethics and stipulations for Fatwa.
30. Monetization (Tawarruq)
31. Gharar Stipulations in Financial Transactions
32. Arbitration
33. Waqf
34. Ijarah on Labour (Individuals)
35. Zakah
36. Impact of Contingent Incidents on Commitments.
37. Credit Agreement
38. Online Financial Dealings
39. Mortgage and its Contemporary Applications.
40. Distribution of Profit in Mudarabah-based Investments Accounts.
41. Islamic Reinsurance
42. Financial Rights and Its Disposal Management
43. Liquidity and Its Instruments
44. Bankruptcy
45. Capital and Investment Protection