HARMONIZATION OF AAOIFI AND IFRS STANDARDS IN ISLAMIC BANKING: EMPIRICAL ANALYSIS AND FINANCIAL REPORTING CHALLENGES

Abstract

The rapid expansion of Islamic banking has intensified a structural tension in financial reporting. Islamic financial institutions (IFIs) are frequently obliged to reconcile the principles-based, substance-over-form orientation of International Financial Reporting Standards (IFRS) with the transaction-specific Financial Accounting Standards issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Because Islamic finance contracts embed distinctive risk-sharing and asset-backing features, the two frameworks diverge materially in the recognition, measurement, and presentation of core instruments, producing a dual-reporting burden that erodes comparability and complicates cross-border capital allocation. This study develops a simulated empirical framework to quantify reporting divergence. We construct a Harmonization Disclosure Index (HDI) comprising four thematic dimensions-asset recognition, profit distribution transparency, fair value measurement, and investment-account classification-and apply it to a simulated cross-section of Islamic banks across ten emerging markets grouped by adoption regime. Index scores are examined through descriptive statistics and a cross-sectional comparison of jurisdictional regimes.
The simulated results indicate that harmonization is highest where regulators mandate AAOIFI standards alongside IFRS and lowest in IFRS-only jurisdictions lacking supplementary guidance for Islamic finance contracts. Divergence concentrates in the classification of profit-sharing investment accounts and in fair value estimation for assets without active markets, with profit distribution transparency emerging as the weakest dimension across the sample.
The evidence supports a convergence architecture in which IFRS provides the presentational backbone while AAOIFI supplies contract-level recognition guidance. For standard-setters, regulators, and institutions, a standardized bridging-disclosure template would materially improve comparability without compromising Islamic finance principles.