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TOPIC 9

MAC4013 ACCOUNTING FRAMEWORK

ISLAMIC ACCOUNTING

Learning Objectives:
Need for Islamic Accounting Islamic Values and Implications for Islamic Economics Conventional Accounting and Mainstream Economics Islamic Economics and Implications for Islamic Economics Compatibility of Accounting Concepts

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Need !r Is"a#ic Acc!$nting


Conventional Accounting is not suitable to Muslim society. Reasons:

It embraces fundamental values and principles w ic are in conflict wit its values !Ali" #$$%& ' an #$$().
Adopting or modifying conventional accounting concepts is deemed insufficient to develop an accounting system w ic consistent wit Islamic norms towards Islamic ob*ectives

+rowing of t e Islamic ban,ing industry in t e global economics !'arim" #$$- and Roy #$$#).
.ameed et al. !#$$/) 0 many organi1ations are see,ing funding from Islamic ban,s operated in line wit t e 2 ari3a .

Establis ment of Islamic organi1ations in many Muslim countries wit Islamic ob*ectives reinforces t e need for Islamic accounting.
In Malaysia" t e establis ment of 4an, Islam Malaysia 4er ad !4IM4) led to rapid growt in Islamic ban,ing operations 5 introduction a structural framewor, 5 Islamic ban,ing financial reporting practices ave been regulated by t e 4NM" t e 4an,ing and 6inancial Institutions Act !4A6IA). t e Islamic 4an,ing Act #$7/" Companies Act #$89 and applicable MA24 2tandards.

TOPIC9-ISLAMIC ACCOUNTING

Iss$e &: Is"a#ic 'an(ing Services


Islamic ban,s and ot er financial institutions t at provide Islamic ban,ing services ave been relying eavily on t e prevailing guidelines issued by 4NM" s ari3a rulings issued by 2 ari3a advisors appointed by t e respective ban,s. : is practice as raised some concerns !MA24" ;--;:
<ac, of comparability of financial performance among ban,s or financial institutions <ac, of comparability of financial performance of individual ban,s or financial institutions over a period of time.
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Iss$e 2: Lac( ! a C!*erent ra#e+!r(


Absence of a proper set of accounting standards for t e recognition" measurement and disclosure of Islamic based transactions. : e e=isting MA24 standards ave not been able to address accounting issues wit in Islamic ban,ing operations ade>uately !MA24" ;--;). 2 a ul .ameed" ;--# said Islamic accounting needs to be broad based covering all Islamic business" government and voluntary organisations.
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Acc!$nting: C!nventi!na" vs Is"a#ic


'asis Objectives Is"a#ic Acc!$nting Islamic accountability 6ala and masla a 2ocial welfare orientation 2ociety" 2ta,e olders C!nventi!na" Acc!$nting ?ecision usefulness for investors" creditors& capital mar,et orientation Mar,et players" 6inance providers

Users -ec!gniti!n

2ocio0economic events" Monetarily measurable Internal include e=ternalities" e=clude economic events s aria pro ibition Monetary .istoric cost

Meas$re#ent Monetary @ Non0monetary 4alanced score card Current valuation .isc"!s$re 2 aria compliance 2ocio0economic

All Amaterial3 economic events

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Iss$e: Inc!r0!rating Is"a#ic va"$es int! c!nventi!na" acc!$nting1


?ifficulties:
E=tending t e notion of accountability into conventional accounting may meet significant resistance as t e Bbusiness caseC as not been successful. <ac, of intensive researc into establis ing a solid t eoretical base for incorporating Islamic values. : e political will may be lac,ing.

It could be argued t at until t ere is a c ange in t e fundamental level in w ic businesses operate" t e issue of w et er Islamic accounting is relevant and necessary remains to be seen.
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C*ristian t*!$g*t vs1 Is"a#ic ec!n!#ics


: e reason for t is is due to t e C ristian focus on t e et ics of interest is premised on t e conse>uences of individual actions on individuals w ereas t e Islamic et ics focuses on t e social conse>uences of collective actions. : us" w ile bot condemned t e practice" t e reason for t e dissatisfaction was dissimilar t oug it could be said t at bot regard economic *ustice as a social good. .owever" t e Islamic viewpoint ta,es on a broader institutionali1ed public accountability. It is vital to appreciate t e nature of Islamic economics and ence accounting.
TOPIC9-ISLAMIC ACCOUNTING

3$nda#enta" Is"a#ic 4a"$es


4elieve in +od : e Dur3an Man as t e Vicegrant : e Ero ibition of Interest : e payment of a portion of one3s wealt " 1a,at" to t e poor : e fulfillment of contracts Complete disclosure of relevant information to parties to any economic or social contract
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Maj!r Is"a#ic Instr$#ents


C oud ury !;--;): epistemology of Fneness of +od and s ari3a . 9 ma*or Islamic economic and financial instruments:
Abolition of interest Erofit0s aring under economic cooperation between labour and capital Goint venture" principally t oug not w olly t roug e>uity participation : e institution of c arity : e avoidance of wasteful use of resources
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Iss$e: I#0"icati!ns ! Is"a#ic ec!n!#ics !r Is"a#ic acc!$nting


Accountability to t e c!##$nit6 !r s!ciet6 at large is a critical aspect of t e Islamic perspective. .ence a s ift to t e Islamic perspective is e=pected to increase focus on accountability and e=panding t e currently narrow focus of responsibility of reporting entities to a wider sta,e older group. : e implications of Islamic economics can be seen in t e following:
6ull disclosure" Eeriodicity" Records" Concept of materiality" Concept of reliability" Eresentation and 6orms of accounting reports" Hnderstanding of BAssets and <iabilitiesC

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Is"a#ic Acc!$nting: '$siness 7t*ics


: e paramount rule in business is onesty and fair dealing !.ussain" #$$$) A Muslim business person s ould as ig moral values and never e=ploit ot ers. Ero ibit monopolies and price fi=ing. 6ree mar,et and not sub*ect to manipulation.
Eeople will not be e=ploited by t e more powerful in business transactions.

4e ave e>uitably" no defect iding" no lier" no stealing goods and oarding.


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Is"a#ic Acc!$nting: S!cia" Acc!$ntabi"it6


: e word esab !account) is repeated more t an 7 times in different verses in t e Dur3an. Account is t e root of accounting Fne3s obligation to Aaccount3 to +od on all matters pertaining to uman endeavour for w ic every Muslims is accountable. All resources made available to individuals are made so in t e form of trust.
Individuals are trustees for w at t ey ave been given by Alla in t e form of goods" property and less tangible assets.
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Is"a#ic Acc!$nting: Acc!$ntabi"it6


<ewis" ;--# stresses t at t e e=tent to w ic individuals must use w at is being trusted to t em is specified in t e s ari3a and t e success of individuals ereafter depends upon t eir performance in t is world.
.e observes t at t e similarity between esab in Islam and Aaccounting3 lies in t e responsibility of every Muslim to carry out duties as described in t e Dur3an.

4usiness is accountable for its actions bot wit in and outside !umma ).
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Is"a#ic Acc!$nting: 3$"" disc"!s$re


<ewis !;--#) motes 8 verses in t e Dur3an refer to Arelevance3 5 it is a disclosure of all facts and financial information is relevant from an Islamic view only it includes t e attribute of trut 0fair and accurate disclosure 2;: %#I now you ave broug t t e trut .. 2(:#/9I be maintainers of *ustice.. Eurpose of accounting information is to serve t e public interest as t e umma as t e rig t to ,now about t e effects of t e organi1ations3 operations. Accountability to Alla 5 paying 1a,at 6ull disclosure also important to predict future obligations and assesses investment ris,. conventional& conservative in asset valuation and income measurements can conform 2 ari3a

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Is"a#ic Acc!$nting: -ec!rds


'eep record of indebtedness
2;:;7;.. J en you contract a debt for a fi=ed period" put in in writing. <et a scribe write it down fairly.. and let t e debtor dictate" not diminis ing t e sum e owesI

Islam provides general approval and guidelines for t e recording ad reporting transactions. In business affairs and trading" all parties3 rig ts and obligations are to be fully documented for verification and e=ploration. 6or instance: Recording material credit loans and transactions !<ewis" ;--#)
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Ot*er Is"a#ic Acc!$nting Attrib$tes


Eeriodicity Materiality Reliability Eresentation 6inancial Accounting Reports Assets and <iabilities
Income Measurement and Capital Maintenance Concept Ka,at and Measurement Issue Asset Valuation and Ero ibition of Interest
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C!#0atibi"it6 ! Acc!$nting C!nce0ts


Accrual basis for recogni1ing revenue and e=penses in terms of amounts e=pected to be received in t e future would seem to pose some difficulties for Islamic Institutions.
Conservatism
using t e lowest values of assets and t e ig est values of e=penses Reporting e=penses sooner t an later Recognising revenues later t an sooner

Matc ing
Recogni1ing e=penses in t e same period as associated revenues
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I#0"icati!ns ! $sing Accr$a" 'asis


Ka,at payment
Mali,i 2c ool" loans !including unearned revenue) are e=empt from 1a,at

Mudaraba principle
2 afii legal doctrine" profit distribution as to be treated as refund of capital

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Ot*er Iss$es in Is"a#ic Acc!$nting


2ubstance Fver 6orm
Islamic: AAFI6I does not endorse t is concept.

Accountability
:o Alla and Hmma

:o conclude: Islamic Accounting: A Jay 6orward


: e accountability based framewor, 5 relation between e accountor" t e supplier of t e accounting information and t e accountee" t e users of t e accounting information. 6airness is viewed as t e fundamental goal t at accoutning strives to ac ieve.

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-!"es ! MAS'
MA243s efforts in formulating Islamic accounting standards. MA2432 efforts currently may be significantly diverted to maintaining congruency wit t e IA24 framewor, for conventional accounting. Maintaining dual accounting conceptual framewor, may be a c allenge for t e national standard setter.

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7nd ! T!0ic 9
MAC4013 ACCOUNTING FRAMEWORK