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The implication of Islamic jurisprudence for the international harmonization of accounting standards has match with the development of Islamic financial institutions and accounting standards. There is the need for standardization on financial reporting practices of Islamic business organization to meet the needs of the users, such as Islamic financial institutions. The paper are discussing the differences or comparing the differences between the conventional Western and Islamic accounting standards.
The preparation of financial statements.
In Islam, the well-being of the umma or Islamic community is considered primary, but for the users of Western financial statements, their primarily concern are to maximize profit and utility.
The ban on riba.
Conventional banking is based on the interest rate spread between the depositors and the borrowers, the receipts and payment of interest is unlawful in Islamic financial transactions. For Islamic banking, riba represent the foundations of Islamic business arrangements.
Acceptable Valuation Methods.
The acceptable valuation methods used in conventional Western accounting are that future values are discounted to net present value by using the discount rate (estimated interest rate). These valuation methods are unacceptable in Islamic accounting because the risk inherent in the uncertainty associated with the calculations. In the basis for financial calculations in an Islamic context, the time value of money concept is not recognized.
The Qur'an required the payment of zakah. The major aim of Islamic accounting standards is to find the accurate asset valuation techniques for zakah. For conventional accounting practices, assets should be valued at current market value. Islamic enterprises should be possible to select appropriate options from those available in relevant international standards in respect to accounting harmonization.
Forbidden Business Activities.
There are forbidden business activities in Shari'a compliant accounting standards such as transactions which involve in alcohol, sale of pork, pornography and any uncertain contracts, while in Western accounting practices, the nature of business are not important.
Recognition and measurement.
In IAS 37, the liability is requires disclosing only when these three conditions are present: i) obligation, ii) reliable measurement and iii) probability of an outflow of resources. While in Islamic standard, they only recognize when the information are available indicate an event will result in the impairment of asset.
In compliance with Shari'a law, the Islamic accounting standards are more focused on the needs of Islamic users. The law applies to all aspects of Muslim life, including economics and business life and also accounting principles and practices. This could support or reject the suggestion that in revising conventional standards to meet the requirements of Islamic jurisprudence the subsequent standards differ substantially from their original format and purpose.
14. Accounting Postulates And Principles From An Islamic Perspective
The paper discuss about the compatibility of accounting postulates and principles with Islamic Law and principles.
The business and the owner are to be viewed as separate entity, income derived from business is not deemed to be income of the owner but the business itself. The financial accounting information shows the activities of the business entity but not the owners. The postulate is accepted in Islamic though, because Muslim jurisprudence (Fiqh) is used to the idea of entity or nominal personality as it is the case for endowment (Waaf), treasury (Baitul Mal) and government.
The Going Concern Postulate.
According to the postulate, except the entity has face to liquidation, it will continue for an unlimited period of time. Thus, the financial statements are only part of a series of continuous reports. However, many accountants disagreed and argued about this postulate as an unreasoning and ridiculous assumption. This assumption does not seem to reject by any of the Islamic principles because there is a principle similar to this postulate, the principle of "retaining" or "accompaniment" in Islamic jurisprudence.
From the Islamic opinion, there is a principle called conservatism principle. It states that when choosing among two or more acceptable accounting practices, some preference is shown for the possibility that has the least favorable influence on the stockholders' equity. Historical costs are acceptable if conservatism is acceptable. Thus historical costs produce misinformation. Accordingly to the conservatism principle, profits may be moved from one year to another year. Additionally, under this principle, valuation of inventories may minimize the base for Zakah. So, the conservatism principle is not well-matched with Islamic principles and rules.
The Objectivity Principle.
The effectiveness of financial information highly depends on the reliability of the measurement technique used. The objectivity principle has been depending on different clarifications as it is based on evidence and it is an impersonal measure that no personal bias included. While from Islamic perspective, it is a desired principle for fairness accounting, mainly for recording different transactions.
The Matching Principle
The matching principle (or convention) states that expenses should be recognized in the same period with revenue. This is the most adequate principles for fairness accounting from an Islamic point of view. As the principle allocates expenses to their related revenues, it made the fairness and justice available to shareholders and depositors in Islamic banks at once. Without a doubt, it is the most importance in the allocating the profits in case of Islamic investment accounts when many investible funds with different maturities is formed.
The Disclosure Principle.
There is a general harmony in accounting that there should be fair and adequate disclosure of accounting data. It is expected that any matter of significance will be disclosed if it would affect the decision of an average investor. From an Islamic viewpoint, adequate disclosure is also one of the desired principles for fair accounting. It provides public with useful information for making financial decisions. Zakah base value and its distribution can also be accomplished as a outcome of this principle.
Although Islamic banks and conventional banks are operate in a different way but it doesn't mean that they are absolutely different financial institutions which need different accounting. Difference accounting principles adopted by difference groups of financial institutions which their aims and objectives are also difference. Hence, all principles and procedures which keep fairness and justice are adopted in accounting for lslamic banks.
15. The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks
Islamic banks have to bear by the exposed doctrines in Islam in conducting their business and financial transactions. They hire in-house religious advisers-Shari'a Supervisory Board (SSB)-who issues a special report to inform the users of financial statements whether or not the bank has followed the Islamic principles. In recent times, the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI) has been set up to externally regulate the financial reporting by Islamic banks.
In regulating the financial reporting by Islamic banks, the FAOIBFI claims that "Financial accounting plays an important role in providing the information which users of the financial statements of Islamic banks depend on in assessing the bank's compliance with the precepts of Shari'a. However, to perform this role effectively, accounting standards need to be developed and complied with by Islamic banks. The development of such standards must be based on clear objectives of financial accounting and agreed upon definitions of its concepts" (FAOIBFI, 1993c, para. 11, emphasis added).
After discussions which involved many difference parties such as Shari'a scholars, it was agreed for adopting the objectives of Western financial accounting that are appropriate for Islamic banks provided that any objective violating the Shari'a principles is excluded, for the development of objectives. According to Shari'a scholars the practice of this approach is acceptable from a Shari'a perspective.
Islamic banks must stand by the Shari'a principles in their business and financial transactions. An internal control processes are set up by SSBs stated that Islamic banks have to promise users of their financial reporting that the transactions showed by the bank do not break the Shari'a rulings.