This study aims to analyze in depth the implementation of Sharia Financial Accounting Standards (PSAK Syariah) and its impact on the measurement of financial performance of Islamic banks in Indonesia, as well as explore the challenges faced. Using an interpretative qualitative approach with case study strategies and supported by literature study data collection techniques to build a solid theoretical and regulatory framework. The results showed that the implementation of PSAK Syariah provides a specific accounting identity that emphasizes Sharia compliance and socio-religious accountability. The unique treatment of temporary Syirkah funds in the statement of financial position and the conservative method of revenue recognition in Murabaha financing significantly affect the structure of the bank's liquidity ratios and profitability. The main challenges are the limitations of human resources with dual competencies, constraints on Accounting Information Systems and the need for consistency of interpretation of PSAK Syariah in the midst of transaction complexity. Therefore, the performance evaluation of Islamic banks is considered optimal if it integrates financial profitability with the results of the Sharia Supervisory Board audit and detailed transparency disclosure.