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MANAMA: Rules that govern Sharia-compliant Waad (promise), Khiyar (option) and Tahawwut (hedging) transactions for Islamic financial institutions have been put in place by a Bahrain-based standard-setting body.
The Accounting Board (AAB) of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) announced the official issuance of financial accounting standard (FAS) 38 Waad, Khiyar and Tahawwut.
The board conducted extensive deliberations including multiple industry consultations where comments were received through public hearing events as well as in writing.
AAB chairman Hamad Al Oqab said: “the board included the Waad and Khiyar project in its work plan, as these have become integral part of many Sharia-compliant products, and are now increasingly being used as stand-alone products. The board observed that clear guidance is required to ensure that accounting treatments of Waad and Khiyar are similar and comparable across jurisdictions and entities.”
He added: “Tahawwut arrangements are also included in the scope of this standard as these are accepted as a method to manage market risks by the institutions”.
The objective of this standard is to prescribe the accounting and reporting principles for recognition, measurement and disclosure in relation to Waad, Khiyar and Tahawwut arrangements for Islamic financial institutions.
Waad and Khiyar are used by institutions in various forms. Some are ancillary to other transactions, whereas a few are used as primary products.
The standard reflects the different types of Waad and Khiyar which are mainly classified into two types – ancillary Waad or Khiyar and product Waad or Khiyar. Ancillary Waad or Khiyar would generally not require to be accounted for separately from the product to which they are ancillary. However, product Waad or Khiyar like foreign exchange future promises shall be subject to accounting under this standard.
The standard says that an IFI may designate a Tahawwut (hedging) relationship between a Waad or Khiyar (referred to as a hedging instrument) and a hedged item where Tahawwut relationship exists.
The intention is to provide accounting principles for both of these, as well as the Tahawwut transactions which are normally based on Waad or Khiyar, or a series or combination thereof.
A key aim of the new standard is to bring the overall accounting and financial reporting approach closer to the global good practices. Additionally, it is believed that it will bring greater conformity to Sharia requirements and to financial reporting.
avinash@gdn.com.bh
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