What is Istisna Accounting?
Istisna accounting refers to the financial reporting of shariah-compliant manufacturing or construction contracts in which the seller (the manufacturer) commits to build or produce a specific asset for the buyer at an agreed price and delivery date.
How It Works
- Recognise the istisna contract upon signing and capture key terms.
- Apply percentage-of-completion accounting where progress and outcome are reliably measurable.
- Recognise istisna revenue and cost in proportion to progress.
- Manage parallel istisna where the bank acts as middleman between the original manufacturer and the end buyer.
- Recognise any losses immediately when expected total cost exceeds total contract value.
Saudi Context
Istisna is used heavily by Saudi Islamic banks for real estate and infrastructure financing, and by manufacturers for large bespoke equipment contracts. The accounting follows AAOIFI standards or SOCPA-adopted IFRS depending on the entity type.
Example
A bank signs a SAR 20,000,000 istisna with a developer for a building, payable in 10 instalments. After year 1, 30% of the project is complete, so the bank recognises SAR 6,000,000 of istisna revenue and the related cost.