Ijarah Accounting: A Comparison Between IFRS and AAOIFI Framework

Ijarah is a Sharia-compliant contractual relationship where an Islamic banking institution assigns the usufruct or right to use a particular asset to a client over a specified time in exchange of specified rental payments where the bank has retained legal ownership and risks associated with the asset. This paper presents a comparative analysis on how Ijarah (Islamic leasing) is treated by International Financial Reporting Standards (IFRS) and Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) standards, with respect to the recurring reporting difference witnessed between Islamic Financial Institutions. This paper is concerned with the lessor point of view on Ijarah Muntahiah Bittamleek (IMBT) or lease to own agreement that exemplifies the conflict between the focus of the legal form and Shariah observance of the AAOIFI and the principle of substance over form used in the IFRS. The disclosure and accounting treatment between the two standards is being compared in the study. To establish the differences between jurisdictional differences, a comparative qualitative approach was taken, where the eight IFIs were considered in a study, four of them are AAOIFI adopting banks operating in Bahrain and Oman and another four are IFRS adopting banks operating in Malaysia with 2 years of annual report being compared. Results indicate that under AAOIFI, IMBT is considered as an operating lease, and the asset remains on the balance sheet of the lessor and the rental income is realised less depreciation, but under IFRS the same contract is considered a finance lease and the asset is not recognised and a financial receivable or right of use asset with a corresponding lease liability are recorded. This duality undermines comparability, transparency and compliance within jurisdictions. The paper advises the issuance of joint guidance by the standard setters to align lessor accounting under the new AAOIFI FAS 32 and IFRS 16 standard, to increase the global standard of consistency and maintain Shariah integrity.