Istisna A

---
name: istisna-a
description: >
  Activate for: istisna'a, construction finance Islamic, manufacturing contract,
  FAS 10, parallel istisna'a, percentage of completion, project finance Islamic,
  istisna'a receivable, istisna'a in progress, construction contract Islamic,
  infrastructure sukuk construction, milestone financing.
metadata:
  version: "1.0"
  author: "Panaversity — The AI Agent Factory"
  standard: "AAOIFI FAS 10 (Istisna'a and Parallel Istisna'a)"
---

## THE STRUCTURE

Istisna'a: Bank contracts to have a specific asset MANUFACTURED or CONSTRUCTED
and then delivers it to the customer. The asset need not exist at contract date.
Unlike salam: payment may be deferred or in stages (not required upfront).

Shariah requirements:
1. The asset must be described with sufficient specificity to prevent gharar (uncertainty).
2. The contractor (manufacturer/builder) agrees to produce the described asset.
3. Delivery terms (time, place, condition) must be agreed.

## PARALLEL ISTISNA'A

Parallel istisna'a: The bank enters CUSTOMER ISTISNA'A (bank is contractor, sells to customer)
and a separate BACK-TO-BACK ISTISNA'A (bank is buyer, construction company is contractor).

The bank is in the middle as intermediary.
The two contracts must be INDEPENDENT (bank bears construction risk in both).

## AAOIFI FAS 10 — REVENUE RECOGNITION

Apply the PERCENTAGE OF COMPLETION method:

**Revenue recognised = Contract revenue x % completion to date — Previously recognised revenue**

% completion methods:
1. Cost incurred to date / Total expected contract cost
2. Architect/engineer certification of physical progress
3. Milestones achieved

**Period-end accounting entry (% of completion method):**
Dr: Istisna'a Receivable / Contract Asset [Revenue to recognise this period]
Cr: Revenue from Istisna'a [Same]

Dr: Construction Costs / WIP [Costs incurred this period]
Cr: Cash / Payables [Same]

Period profit = Period revenue - Period costs incurred

**If contract is a LOSS-making contract (expected costs > contract price):**
Recognise the FULL expected loss immediately in the current period.
Dr: Loss on Istisna'a Contract [Full expected loss]
Cr: Provision for Istisna'a Loss [Same]

## IFRS 15 COMPARISON

IFRS 15 over-time revenue recognition applies if:
- Customer simultaneously receives and consumes benefits (services)
- Customer controls the asset as it is created (construction on customer's land)
- Seller's performance creates an asset with no alternative use + enforceable right to payment

Arithmetic of % completion is IDENTICAL under AAOIFI FAS 10 and IFRS 15.
Key difference: AAOIFI requires explicit Shariah compliance confirmation of milestone
specifications (to satisfy gharar prohibition). IFRS 15 does not require this.

## PARALLEL ISTISNA'A — NETTING QUESTION

Gross vs. Net presentation:

GROSS (default): Show:
- Istisna'a Receivable from customer (asset)
- Istisna'a Payable to contractor (liability)

NET (if offset criteria are met — IAS 32):
- Net asset or net liability position

Criteria for netting: Must have both a legal right to set off AND the intention to settle
on a net basis or simultaneously. In most parallel istisna'a structures, these criteria are
NOT met → GROSS presentation is required.

BALANCE SHEET IMPACT: Gross presentation can double the reported balance sheet size.
This has direct regulatory capital implications for the bank.

## MANDATORY DISCLOSURES

**AAOIFI FAS 10:**
1. Accounting policy: percentage of completion method
2. Revenue recognised from istisna'a in the period
3. Contract assets (amounts due from customers)
4. Contract liabilities (amounts due to customers — advance receipts)
5. Expected losses on onerous contracts
6. For parallel istisna'a: gross vs. net presentation basis
7. Shariah compliance: confirmation specifications were sufficient to prevent gharar

**IFRS 15 (IFRS regimes):**
1. Disaggregation of revenue (by contract type: istisna'a vs. other)
2. Contract balances (opening, recognised, invoiced, closing)
3. Performance obligation satisfaction timing
4. Significant judgments: method for estimating % completion