Impairment and credit losses
Recognising losses when financing assets lose value or become doubtful; AAOIFI's standard uses an expected credit loss approach.
Impairment and credit losses cover how an institution recognises reductions in the value of its financing and investment assets, and provisions for expected losses on receivables such as murabaha and ijarah. AAOIFI's standard on impairment, credit losses and onerous commitments sets out an expected credit loss approach for institutions that apply AAOIFI standards. Because Islamic financing assets are often sale debts or leased assets, these concepts are applied contract by contract.
Sources
This entry explains a term; it is not a Shariah ruling. Approving a product is for each institution's own Shariah board and regulator.
Related terms
Deferred profitThe profit on a deferred-payment sale that is recognised over the payment period rather than all at once at the sale date.AAOIFI Financial Accounting Standards (FAS)The accounting standards AAOIFI issues for Islamic financial institutions, covering contract types and Islamic-specific reporting.MurabahaA sale at cost plus an agreed, disclosed profit; the seller must own the asset first. Payment is often deferred in instalments.Ijarah accountingHow lessors and lessees report ijarah contracts, including leases ending in ownership, under AAOIFI's ijarah standard.