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Islamic Finance




Substance and Form


In accounting, substance of a transaction/ event implies its actual and original nature and economic reality, while form (legal form) is the way the transaction/ event is recorded in the books of account. If the substance and economic reality are not in conformity with the legal form, the information relating to a given transaction will imply a case of an incompatibility with the Shari’ah principles and rules.

According to Islamic accounting norms and conventions, substance and form come together, and none of these two concepts shall be observed single-handedly at the expense of the other. In other words, “substance over form” is not an acceptable norm under Islamic accounting, as it may involve certain fictitious transactions that appear to be meeting the requirements of legal form, but whose economic reality is entirely different (e.g., in sales, true sale versus fictitious sale).

If a transaction is reduced into a certain contract, and the reality or economic substance of the execution of the contract is not in accordance with the contractual terms and conditions, this will cause the transaction to deviate from the Shari’ah principles and rules embedded in the contract.



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