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Conventional accounting objectives and concepts are needed to guide existing accounting practice, prescribe future accounting practice and define key terms and fundamental accounting issues. The conventional accounting process aims to allow informed decisions whose ultimate purpose is to efficiently allocate scarce resources available to their most efficient uses by providing information efficiency in the market. The measurement is based on the cost principle that considers the acquisition cost or historical cost as the appropriate measurement basis. The conventional accounting adopts the historical cost and conservatism concept is to ensure the repayment from capital. However, this principle is questionable from the Islamic point of view due to it conflicts with the concept of fairness and justice.
Islamic finance and banking growth rapidly during the last twenty years in Muslim countries around the world. Islamic accounting is needed to serve different principles of financial instruments that are founded on the Islamic worldview and syariah requirements. This development under the strongholds country such as Malaysia, Bahrain and Pakistan, is now increasingly being witnessed. There are many new challenges faced by Islamic financial institutions and conventional, multinational financial institutions that provide Shariah compliant products within the same industry. It is not surprising that some Islamic financial institutions would prefer to report in the global accounting which apply IFRS for competitive reason. IFIs may wish to report under IFRS, they are sometimes restricted because of local requirements or concerns from users of their financial reports.
On the other hand, accounting concepts are variously referred to as principles, axioms, postulates, assumptions and rules. As mention above, the basic accounting principles is the use of historical cost for asset valuation that derived from the concept of conservatism. There is an issue raise that Islamic accounting doubts on the relevance of the concept of conservatism. Let us refer to the principles of zakat where trade assets subjected to zakat must be based on current market value or cash equivalent value. Majority scholars recommended the use of current prices on the due date of zakat. The argument for the use of current market value is based on the needs for the most accurate valuation of wealth to be subjected for zakat in order to serve justice to both the zakat recipients and zakat payers. However, the principle of conventional accounting practice is choosing lower of cost or market value. This will cause to understatement of trade assets to be subjected for zakat in financial report if we practice conventional accounting. This kind of cost concept definitely cannot be acceptable in Islam. The preparation of financial information in Islam should be aimed for justice and fairness as well.
Accounting recognition refers to recording the basic elements of the financial statements. The concepts of accounting recognition define the basic principles that determine the timing of revenue, expense, and gain and loss recognition in the entity's income statement. In conventional accounting the revenues should be recognized when realized. Realization of revenue occurs when entity has the right to receive the revenue and the obligation on the part of another party is remit. The use of accrual basis accounting has been claimed to be better than the alternative cash basis accounting. Accrual basis of income recognition does meet the requirement of Islamic objectives .While cash accounting most likely provides an underestimate value of wealth as the recognition is based on actual cash received and paid.
From traditional perspective, the matching principle recognized the expense when the expense is related directly to generate revenues or it relates to the period when the expense is incurred. From the Islamic perspective, the matching principle which allocates expenses to their related revenues provides fairness and justice simultaneously to the shareholders and other stakeholders.
The measurement attributes to the financial report should be guided by the relevance, reliability, understandability and comparability of the information to be provided to the users. In order to ensure the reliability and comparability of the cash equivalent value, it must be supported with objective indicators, logical and relevant valuation methods, consistency of the use of valuation methods, expert valuation, and conservatism in the valuation process.
In terms of disclosure requirements, traditional accounting perspective provides limited disclosure provision of information that subject to public interest. However, Islamic accounting perspective requires full disclosure in the financial report in order to satisfy any reasonable demand for information in accordance with the principle of Shariah. Their full disclosure does not mean to disclose everything in the report but the preparer of account should disclose everything that is believed as importance to users for purposes of serving God. The Islamic concept of social accountability is to encompass the accountability ultimately to God. The fundamental concept of Islamic accountability is where Muslims believed that all resources are made available to individuals in a form of trust. The success of individuals depends on their performance in life.
Although all of the different critique of conventional accounting point out its deficiencies from their own perspectives, many of the issues raised are common to which Islamic academics would have concerns. Some of the concerns about the application of conventional accounting to Islamic societies are raised by researchers in other areas. They specifically exclude a religious content due to the differences between Islam and the history of secularization of knowledge in Western society. The researcher attempts to highlight these differences especially when the proposed solutions are not compatible with an Islamic framework.
Reason why the issue under discussion is crucial
Policy, Practices, Pedagogy perspective
We had found that the current issue under discussion is crucial because of the lack of standardized in accounting. Most of the multinational conventional banks that offer Islamic finance normally will make the report based on their local requirement. IFRS is the most common form of reporting because of the reporting purpose own to the jurisdiction. Although their Islamic finance operations is incurred in large amount, the conventional alternative is continue apply in the report. It is hard for the investor to make their decision when the financial institutions apply different standard in their financial report. The application of difference accounting practices by the financial institutions can cause the difficulties in the preparation of financial report. For institutions offering Islamic finance products and services, the
Standards applied may not offer appropriate disclosure requirements because of the differences and difficulties.
There is significance different in objectives of financial reporting between the Islamic perspective and Conventional perspective. From the conventional perspective, we know that the objective for accounting in financial report should provide information which is relevant and reliable that allows its users to make correct decision. From the Islamic perspective, the objective of financial reporting is to ensure the entity is follow the principles of Shariah and its concepts of fairness, priorities to society and compliance with business values. IFRS is reliant on a strong framework of principles that emphasise on profit maximization and economic event or transaction whereas in Islamic finance the transaction should be based on the provisions of the shariah. IFSs are faced with the very real dilemma of reporting their performance and position against the same set of users in the global financial markets.
Despite the recent global economic downturn, Islamic finance has continued to grow rapidly at the global levels and now become an important part of the international financial services landscape. There are some reasons that Islamic accounting is rising which is to fulfill the needs of Islamic community where the aspects of conventional accounting do not accord to the Islamic principles. A homogeneous code of Shariah compliance finance had emerged around the world in the new century. A conflict occurs between the transactions and product accord to Shariah compliance and conventional accounting which may lead to a clear lack of a single financial reporting framework. Thus, similar entities become difficult in make comparability across border on the financial report. This lack of consistency could be drawback due to increasing demands by investor in IFIs, who look for greater opportunity in global market. This report sets the scene for a broad project which will aim to inform the international agenda on financial reporting by IFIs and support the work of accounting and auditing standard setters in this area. The main objective of this discussion is to determine the quality of financial report from Islamic and Conventional Accounting Perspective based on the characteristic of relevant and reliable issue. The usefulness of financial report is important to enables users make the correct judgments, predictions and economic decision. We will find out the argument of the practice and policy among the two different perspectives which could influence the quality of financial report. We will further outlines key practices in Islamic finance distinct from those found in conventional finance and that could lead to misrepresentations of financial information if they were accounted for using IFRS. In the discussion, our group members will express our opinion under the Islamic and Conventional accounting perspective based on the argument. Some considerations relating to the specific practices of IFIs are stated in the body of this report. We hope the findings can further encourage the development of strengthen the financial reporting of Islamic financial institutions.