Istisna
In one sentenceA contract in which the buyer asks the manufacturer to make a specified item at an agreed price, with materials and work provided by the manufacturer.
Simply put
It is used in contracting and manufacturing: constructing a building or making equipment to order. The price may be paid in installments linked to stages of completion, unlike Salam, where the full price is paid in advance.
In accounting, the manufacturer treats the contract under IFRS 15: if the conditions for recognition over time are met, it records revenue by the percentage of completion; otherwise it records it on delivery.
Worked example
A steel structures factory signed an Istisna contract worth 900,000 SAR with an estimated cost of 600,000 SAR, and spent 240,000 SAR by year end; the contract meets the conditions for recognition over time.
Percentage of completion: 240,000 ÷ 600,00040%
Revenue recognized: 900,000 × 40%360,000 SAR
Profit recognized: 360,000 − 240,000120,000 SAR
Profit for the year from the contract120,000 SAR
Formula: Revenue = contract value × (costs incurred ÷ total estimated costs)
Don't confuse it with
SalamSalam is the sale of specified goods with the full price paid upfront, and the seller does not have to make them himself.