Abstract

Islamic banks use finance leases as a mode of financing, after incorporating major alterations in the structure of
the contract in order to meet Shariah principles. In this case, the contract is called ‘Ijarah Muntahia Bittamleek’.
As different structures might lead to different accounting results, the Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) issued Financial Accounting Standards to tackle the accounting
treatment for such transactions. The paper criticised the accounting treatment offered by AAOIFI for violating
the matching principle and lacking faithful representation. Suggested amendments for accounting treatments are
also proposed.

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