This qualitative study provides an in-depth analysis of the balance-sheet implications of the draft AAOIFI Shari’ah Standard No. 62 (SS 62) for Islamic banks across the Gulf Cooperation Council (GCC). Addressing key regulatory and reporting distinctions, the paper clarifies how evolving Shari’ah guidelines for Sukuk structures indirectly shape asset-liability presentation, risk management, and financial disclosures.
Key Highlights & Value Takeaways
• Conceptual Clarity: Establishes a crucial distinction between SS 62 as a Shari’ah standard and dedicated Financial Accounting Standards (AAOIFI FAS / IFRS 9), showing how Shari’ah rules influence transaction designs before accounting rules dictate balance-sheet entries.
•Grounded in Official Reality: Incorporates the latest standard-setting developments, recognizing SS 62’s status as a draft under consultation to deliver forward-looking, realistic analysis rather than premature empirical claims.
•360° Institutional Assessment: Evaluates the ripple effects of proposed Sukuk structural changes across core banking functions—including asset-liability presentation, liquidity management, credit risk, and Shari’ah governance.
•Policy & Market Guidance: Outlines strategic considerations for GCC regulators and Islamic financial institutions navigating multi-jurisdictional compliance, disclosure obligations, and market stability.
Potential Balance-Sheet Implications of AAOIFI Shari’ah Standard No. 62: Evidence and Policy Considerations for Islamic Banks in GCC Countries
Abstract
The development of Shari’ah standards for Sukuk has important implications for Islamic financial institutions, particularly in the Gulf Cooperation Council (GCC), where Islamic banking and Sukuk markets are well established. This study examines the potential balance-sheet implications of AAOIFI Shari’ah Standard No. 62 (SS 62), focusing on Sukuk structures, recognition, measurement, disclosure, risk management and regulatory considerations. The study adopts a qualitative conceptual research design based on authoritative AAOIFI publications, applicable financial-reporting standards, GCC banking evidence and recent academic literature. A critical distinction is made between SS 62 as a Shari’ah standard and AAOIFI Financial Accounting Standards governing accounting treatment. This distinction is necessary because SS 62 does not itself constitute an accounting standard prescribing the recognition and measurement of financial statement items. Furthermore, AAOIFI confirmed in April 2025 that SS 62 remained a draft subject to amendment and consultation. The study therefore does not claim that SS 62 has already caused measurable balance-sheet changes in GCC Islamic banks. Instead, it examines the mechanisms through which its proposed Shari’ah requirements could influence Sukuk structures and subsequently interact with applicable accounting and regulatory frameworks. The analysis indicates potential implications for asset and liability presentation, financial reporting, disclosure, liquidity, risk management and Shari’ah governance. The study concludes that the eventual balance-sheet consequences will depend on the final form of SS 62, regulatory adoption, the accounting framework applicable to individual institutions and the manner in which Islamic banks implement the requirements.
Keywords: AAOIFI; Shari’ah Standard No. 62; Sukuk; Islamic banking; balance sheet; financial reporting; GCC; Shari’ah governance.
1. Introduction
Sukuk have become an important component of Islamic capital markets, providing governments, financial institutions and corporations with mechanisms for raising Shari’ah-compliant financing. Unlike conventional debt securities, Sukuk structures are designed around Shari’ah-compliant contractual arrangements and may involve underlying assets, usufructs, projects, businesses or investment activities. The legal and economic characteristics of these structures consequently have implications for investors, issuers, regulators and financial reporting.
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) plays an important role in developing standards for Islamic financial institutions. Its standards cover Shari’ah, accounting, auditing, governance and ethical matters. Within this standard-setting framework, AAOIFI developed Shari’ah Standard No. 62 on Sukuk. However, the status of the standard is fundamental to the interpretation of its potential implications. In April 2025, AAOIFI officially stated that SS 62 remained at the draft stage, had not been finalised and was subject to extensive consultation.
This fact creates an important methodological limitation. It would be inappropriate to claim that SS 62 has already produced measurable balance-sheet effects across Islamic banks in the GCC. Rather, the appropriate research question concerns the potential mechanisms through which the proposed standard could influence Sukuk structures and, consequently, financial reporting and balance-sheet presentation.
The distinction between Shari’ah and accounting standards is equally important. AAOIFI has separately issued Financial Accounting Standard No. 33 (FAS 33), concerning investments in Sukuk, shares and similar instruments, and FAS 34, concerning financial reporting for Sukuk-holders. FAS 33 addresses classification, recognition, measurement, presentation and disclosure, while FAS 34 addresses reporting concerning the assets and businesses underlying Sukuk.
Accordingly, this study conceptualises the relationship as:
SS 62 → Sukuk structure → contractual/economic characteristics → applicable accounting framework → financial reporting → potential balance-sheet implications.
The GCC is an appropriate context because of the region's substantial Islamic banking and Sukuk activity. However, the six GCC countries do not operate under identical legal, regulatory and accounting frameworks. The study therefore avoids treating GCC Islamic banks as a homogeneous population.
The study contributes to the literature by examining the potential consequences of SS 62 while distinguishing between what the draft Shari’ah standard proposes, what existing accounting standards require, and what may ultimately occur following implementation.
2. Background of AAOIFI Shari’ah Standard No. 62
2.1 AAOIFI's Standard-Setting Role
AAOIFI has developed an extensive body of standards for Islamic financial institutions. Its accounting standards include FAS 33 on investments in Sukuk, shares and similar instruments and FAS 34 on financial reporting for Sukuk-holders. Its standards catalogue also includes standards addressing consolidation, impairment, control of assets and businesses, quasi-equity and off-balance-sheet assets under management.
This broad framework demonstrates that the accounting treatment of Sukuk cannot be attributed to SS 62 alone.
2.2 Development and Current Status of SS 62
AAOIFI released the exposure draft of SS 62 on Sukuk in November 2023. The organisation subsequently extended the deadline for industry feedback to 31 July 2024.
The exposure draft addresses different Sukuk structures and includes provisions relevant to the Shari’ah character and structuring of Sukuk.
However, AAOIFI subsequently confirmed in April 2025 that the first draft was being amended in light of industry comments and that the standard had not yet been finalised.
Consequently, SS 62 should currently be treated as a developing Shari’ah framework, not as an effective standard whose historical balance-sheet effects can already be measured.
2.3 Relationship Between SS 62 and Accounting Standards
A central issue in this study is the distinction between Shari’ah standardisation and financial accounting.
SS 62 concerns the Shari’ah dimensions of Sukuk. Accounting standards determine how the resulting transactions and instruments are recognised, measured, presented and disclosed.
AAOIFI's FAS 33 specifically establishes principles for investments in Sukuk, shares and similar instruments. AAOIFI states that FAS 33 superseded FAS 25 and addresses classification, recognition, measurement, presentation and disclosure according to the characteristics and business model of the investment.
FAS 34 complements this framework by addressing financial reporting for Sukuk-holders and the assets and businesses underlying Sukuk.
Therefore, the potential effects of SS 62 should be understood as indirect and interconnected, rather than as automatic accounting consequences.
3. Theoretical Framework
The theoretical framework is based on the proposition that changes in Shari’ah requirements can influence contractual structures and economic relationships, which may subsequently affect financial reporting.
Conceptual pathway:
Draft SS 62
↓
Shari’ah requirements
↓
Sukuk structure
↓
Ownership, control and contractual rights
↓
Risk and economic exposure
↓
Applicable accounting assessment
↓
Recognition and measurement
↓
Presentation and disclosure
↓
Potential balance-sheet implications
This framework avoids the unsupported assumption that SS 62 itself directly changes accounting balances.
3.1 Recognition
The recognition of an asset or liability depends on the relevant accounting framework and the underlying economic and contractual characteristics of the transaction.
Questions include:
• Who controls the underlying asset?
• Has an asset actually been transferred?
• Who bears the relevant risks?
• What rights do Sukuk-holders possess?
• What obligations remain with the originator?
• Is the arrangement an investment, financing arrangement or another exposure?
AAOIFI's evolving Sukuk accounting framework is particularly relevant here. AAOIFI's FAS 29 project, for example, addresses Sukuk issuance in the books of the originator and considers whether structures may be presented as equity, quasi-equity, financial liabilities or non-financial liabilities depending on control, risks, rewards and fiduciary responsibilities.
This illustrates why the relationship between Sukuk structure and balance-sheet presentation is more complex than simply classifying a Sukuk as either an asset or liability.
3.2 Measurement
Measurement affects reported assets, income, equity and financial ratios.
Under IFRS 9, classification and measurement of financial assets depend principally on the business model and contractual cash-flow characteristics. AAOIFI FAS 33 provides a Shari’ah-oriented framework for investments in Sukuk and similar instruments.
Therefore, different accounting frameworks can produce different reporting outcomes for economically similar instruments.
3.3 Off-Balance-Sheet Considerations
Off-balance-sheet treatment can arise where the reporting institution does not recognise underlying assets as its own assets under the applicable accounting framework.
The relevant assessment may involve:
• control;
• transfer of risks;
• contractual rights;
• agency relationships;
• fiduciary responsibilities; and
• consolidation requirements.
Consequently, the proposed Shari’ah requirements of SS 62 could have implications for transaction design, but the ultimate accounting presentation remains dependent upon the applicable accounting framework.
4. Methodology
4.1 Research Design
The study uses a qualitative conceptual research design.
This approach is appropriate because SS 62 remains under development and therefore does not provide a suitable basis for a conventional post-implementation causal analysis.
The study instead examines the potential relationships between:
• SS 62;
• Sukuk structures;
• accounting standards;
• financial reporting;
• risk management; and
• GCC regulatory practices.
4.2 Data and Sources
The research uses documentary evidence from four principal categories.
Primary sources: AAOIFI standards and official statements; IFRS Foundation standards; GCC regulatory publications.
Institutional sources: Islamic bank annual reports; Sukuk documentation; financial statements.
Academic sources: peer-reviewed research on AAOIFI; Sukuk; Islamic financial reporting; Shari’ah governance; Islamic-bank risk; and GCC Islamic banking.
A systematic literature review by El-Halaby et al. identified substantial research on AAOIFI standards but also highlighted continuing gaps concerning adoption, compliance, consequences and regulatory roles.
4.3 Analytical Procedure
The study follows four stages:
Stage 1 — Identification: Relevant SS 62 provisions and Sukuk characteristics are identified.
Stage 2 — Classification: Potential implications are grouped into assets, liabilities, equity, income, disclosure, liquidity and risk.
Stage 3 — Accounting mapping: Potential effects are compared against applicable AAOIFI and IFRS requirements.
Stage 4 — Policy analysis: Implications are considered in relation to GCC regulation and Islamic-bank governance.
4.4 Unit of Analysis
The primary unit of analysis is the Sukuk structure and its relationship with the financial reporting of Islamic financial institutions.
The GCC serves as the geographical setting rather than as a single unified regulatory jurisdiction.
5. Evidence and Analysis
5.1 Existing Sukuk Activity
GCC Islamic banks provide an important empirical context for analysing the possible implications of SS 62 because Sukuk are already an established financing and investment instrument in the region.
However, existing Sukuk activity does not constitute evidence that banks have implemented SS 62.
The appropriate analytical approach is therefore to examine existing Sukuk structures and determine how the proposed requirements of SS 62 could potentially alter their Shari’ah, contractual or economic characteristics.
This distinction is particularly important given AAOIFI's confirmation that SS 62 remained a draft in April 2025.
5.2 Asset Recognition and Measurement
Potential balance-sheet implications arise primarily through the relationship between Sukuk structure and accounting treatment.
FAS 33 provides accounting principles for investments in Sukuk, shares and similar instruments, including classification, recognition, measurement, presentation and disclosure.
The implication for SS 62 is therefore indirect.
If the final Shari’ah standard requires changes in ownership, asset transfer, contractual rights or risk-sharing arrangements, those changes may alter the characteristics that an accounting framework evaluates.
Thus:
SS 62 may influence the underlying transaction, while the applicable accounting standard determines the financial-statement treatment.
5.3 Liability and Financing Structure
Sukuk structures can produce different economic relationships between originators, SPVs, investors and underlying assets.
The accounting consequences may include presentation as:
• financial liabilities;
• equity;
• quasi-equity;
• investment assets; or
• other forms of exposure.
AAOIFI's FAS 29 project illustrates the importance of this issue by explicitly addressing classification and presentation of Sukuk issued by originators.
This supports the study's argument that the balance-sheet consequences of Sukuk depend on both structure and accounting assessment.
5.4 Income and Profitability
Potential changes in Sukuk structure and measurement can influence:
• income recognition;
• profit volatility;
• valuation changes;
• equity; and
• profitability ratios.
However, these outcomes should not be attributed directly to SS 62.
Instead, SS 62 may influence the characteristics of a transaction, while applicable accounting standards determine how income and valuation changes are recognised.
5.5 Impairment
Impairment should likewise be analysed through the applicable accounting framework rather than treated as a direct SS 62 requirement.
AAOIFI maintains separate accounting standards addressing impairment and credit losses. Its standards catalogue identifies FAS 30 as the relevant standard in this area.
This reinforces the importance of maintaining a clear distinction between SS 62 and AAOIFI's accounting standards.
5.6 Liquidity
Sukuk can play an important role in Islamic banks' liquidity management because Shari’ah-compliant securities may provide investment and liquidity-management opportunities.
However, SS 62 should not be described as a liquidity-management standard.
Its potential effect would instead arise indirectly through changes in Sukuk structures, tradability, risk characteristics and investor demand.
6. Comparative Analysis with Conventional Financial Reporting Standards
The comparison with IFRS should focus on accounting treatment rather than treating SS 62 and IFRS as equivalent types of standards.
6.1 AAOIFI and IFRS
IFRS 9 provides a framework for classification and measurement of financial assets based on business models and contractual cash-flow characteristics.
AAOIFI FAS 33 similarly establishes a specialised framework for Shari’ah-compliant investments in Sukuk, shares and similar instruments.
The difference is therefore not simply technical. AAOIFI standards operate within an Islamic-finance framework in which Shari’ah requirements are relevant to the nature of permissible transactions.
6.2 Convergence and Divergence
Recent literature continues to examine the relationship between AAOIFI and IFRS. Research reviewing AAOIFI standards indicates that differences remain in conceptual orientation, standard-setting objectives and application across jurisdictions.
This creates a practical issue for GCC institutions operating across multiple jurisdictions.
An Islamic bank may therefore need to manage three related but distinct considerations:
1. Shari’ah compliance;
2. applicable accounting requirements; and
3. national regulatory requirements.
7. Financial Reporting and Disclosure
Disclosure is particularly important because Sukuk investors require information about the underlying assets, contractual rights and risks.
AAOIFI FAS 34 was developed specifically to establish financial reporting principles for the assets and businesses underlying Sukuk and to improve transparency for Sukuk-holders.
Recent empirical research also demonstrates the importance of disclosure in GCC Islamic banking. A 2021 study examining Islamic social reporting among GCC Islamic banks found a relationship between disclosure levels and bank performance indicators.
More recent evidence from GCC Islamic banks likewise shows the growing importance of structured disclosure frameworks in assessing institutional performance.
These findings do not demonstrate an effect of SS 62 itself, but they strengthen the argument that any future implementation of SS 62 should be accompanied by clear disclosure requirements.
8. Risk Management and Internal Controls
The potential implementation of SS 62 also raises questions concerning internal control and Shari’ah governance.
The principal risks include:
• Shari’ah non-compliance risk;
• legal risk;
• credit risk;
• liquidity risk;
• market risk;
• operational risk; and
• fiduciary risk.
The control framework should connect:
Shari’ah approval → legal documentation → transaction execution → accounting assessment → financial reporting → Shari’ah review.
This integrated process is important because inconsistency between Shari’ah approval and accounting or legal implementation could increase institutional risk.
The broader AAOIFI literature also identifies Shari’ah compliance, adoption and institutional governance as important areas for continued empirical investigation.
9. Policy and Supervisory Considerations
9.1 Regulatory Coordination
GCC regulators should clarify the relationship between:
• AAOIFI Shari’ah standards;
• AAOIFI financial accounting standards;
• IFRS;
• national legislation; and
• securities-market regulations.
This is particularly important because the GCC does not have a single unified financial-reporting regime.
9.2 Investor Protection
Future implementation should provide investors with sufficient information concerning:
• underlying assets;
• ownership;
• contractual rights;
• payment mechanisms;
• guarantees;
• redemption arrangements;
• risk allocation; and
• Shari’ah governance.
9.3 Shari’ah Governance
The implementation of an evolving standard requires strong Shari’ah governance mechanisms.
These should include:
• initial Shari’ah approval;
• ongoing Shari’ah review;
• Shari’ah audit;
• documentation controls;
• compliance monitoring; and
• corrective procedures.
9.4 Market Stability
A particularly important policy consideration is the possibility that rapid implementation could affect existing Sukuk structures and market practices. Scenario-based research examining the prospective implementation of SS 62 argues that the timing, phasing, and sequencing of regulatory adoption will be critical to maintaining market stability, liquidity, and confidence across GCC financial centers.
10. Limitations and Future Research
This study is subject to specific conceptual and empirical limitations. First, because AAOIFI Shari’ah Standard No. 62 remained an exposure draft as of April 2025, empirical data on post-implementation financial statement impacts are not yet available. Consequently, the research is inherently prospective and conceptual rather than empirical.
Second, heterogeneity across GCC member states regarding regulatory mandates, legal environments, and financial reporting standards (AAOIFI FAS vs. IFRS) precludes a uniform, one-size-fits-all empirical model.
Future research should be conducted in the following areas once SS 62 is finalized and formally adopted:
• Empirical quantitative assessments of balance-sheet reclassifications across GCC Islamic banks following formal adoption.
• Comparative studies investigating how dual-reporting institutions reconcile AAOIFI Shari’ah provisions with IFRS 9 asset classification.
• Analysis of the cost of capital and secondary-market yield reactions following the implementation of updated Sukuk structures.
• Longitudinal evaluation of Shari’ah compliance costs and operational risks incurred during corporate restructuring under the finalized standard.
11. Conclusion
This study has evaluated the potential balance-sheet implications of AAOIFI Shari’ah Standard No. 62 for Islamic banks within the GCC. By addressing previous factual misconceptions, the analysis establishes that SS 62 remained a draft under consultation as of April 2025 and had not been finalized or universally implemented.
The core insight of this study is the conceptual separation between Shari’ah standards (which govern the contractual and ethical parameters of financial instruments) and financial accounting standards (such as AAOIFI FAS 33/34 or IFRS 9, which govern financial recognition and measurement). SS 62 does not directly alter balance-sheet figures; rather, its proposed Shari’ah requirements may alter the underlying ownership rights, control dynamics, and risk-sharing characteristics of Sukuk structures. These underlying shifts, in turn, trigger specific accounting treatments under the governing accounting framework.
For Islamic banks in the GCC, the ultimate balance-sheet impact will depend heavily on the final text of SS 62, the pace and scope of regulatory adoption by central banks, the prevailing accounting frameworks (IFRS versus AAOIFI FAS), and institutional risk management strategies. Proactive regulatory coordination and robust Shari’ah governance will be vital to ensuring a seamless transition that upholds Shari’ah integrity without causing market disruption.
References
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Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). (2019). Financial Accounting Standard No. 34: Financial Reporting for Sukuk-Holders. Manama: AAOIFI.
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