Professional Documents
Culture Documents
Deni&on
Islamic accounting can be defined as the accounting process which provides
appropriate information (not necessarily limited to financial data) to
stakeholders of an entity which will enable them to ensure that the entity is
continuously operating within the bounds of the Islamic Shariah and
delivering on its socio-economic objectives.
the process of identifying, measuring and communicating economic and
other relevant information, inspired by the Islamic worldview and ethics,
and complied with the Shariah (Islamic law) in order to permit informed
judgments and decisions by potential and expected users of information to
enhance social welfare and seek the blessings of Allah. Islamic accounting
is also a tool, which enables Muslims to evaluate their own accountabilities
to God (in respect of inter-human/environmental transactions).
Basis
of
Dieren&a&on
Objec've
of
providing
informa'on
Islamic
Accoun&ng
D e c i s i o n
r e l a ' n g
t o
assessment
of
compliance
w i t h
t h e
S h a r i a h
i n
organiza'onal
dealings
and
the
extent
of
mee'ng
its
o b j e c ' v e s
( I s l a m i c
accountability).
Conven&onal
Accoun&ng
Decision
rela'ng
to
ecient
a l l o c a ' o n
o f
s c a r c e
resources
mostly
buy,
sell
or
hold
decisions
on
their
investments
(Decisions
usefulness).
S/
No.
2
Basis
of
Dieren&a&on
the
type
of
the
informa'on
that
is
iden'ed,
how
it
is
measured,
r e c o r d e d
a n d
communicated
Islamic
Accoun&ng
Iden'fy
socio-economic
and
r e l i g i o u s
e v e n t s
a n d
transac'ons
and
records
them
using
both
historical
cost
and
current
valua'on
(current
valua'on
is
used
at
least
on
accoun'ng
for
Zakat).
It
also
engages
in
rep o r' n g/ d i s aggrega' n g
items
into
haram
and
halal
elements.
For
example,
nance
income
would
have
t o
b e
s p l i J e d
i n
t o
conven'onal
interest
and
income
from
the
various
types
of
Shariah
compliant
contracts.
Conven&onal
Accoun&ng
Concentrates
on
iden'fying
e c o n o m i c
e v e n t s
a n d
transac'ons
and
record
them
using
historical
costs
(or
net
realizable
value,
whichever
is
l o w e r ) .
C o n v e n ' o n a l
accoun'ng
has
tried
in
the
p a s t
t o
o v e r c o m e
t h e
l i m i t a ' o n
o f
h i s t o r i c a l
accoun'ng
through
ina'on
accoun'ng
and
current
value
accoun'ng,
but
the
ideas
were
given
up
due
to
their
complexity
and
lack
of
objec'vity.
Users
of
the
informa&on
F o c u s e s
m o r e
o n
shareholders
and
creditors
who
are
nanciers
and
providers
of
funds.
4.
Conven&onal
accoun&ng
is
claimed
by
some
writers
to
be
a
product
of
culture
and
it
is
based
upon
modern
commercial
law.
It
is
a
set
of
beliefs
and
techniques
that
has
the
ability
to
link
ac&ons
and
values
so
as
to
legi&mise
those
ac&ons.
If
there
are
some
restric&ons,
they
are
imposed
by
human
beings
and
subject
to
change
t h r o u g h
d e m o c r a & c
legisla&on.
Accountability
Founda'on
Accountability
in
Islam
e n c o m p a s s e d
a
t w o
dimensional
context,
rst,
horizontal
accountability
to
fellow
human
beings
i . e .
t h e
p u b l i c
a n d
s t a k e h o l d e r s
a n d
s e c o n d l y ,
u l & m a t e
t r a n s c e n d e n t a l
accountability
to
Allah.
R e l i g i o u s
( t h e r e
i s
a
j u d g m e n t
d a y
i n
t h e
t h e
h e r e a N e r
w h i c h
mankind
pay
responsibility
during
his/her
life
before
the
God
and
there
is
hell
for
punishment
and
heaven
for
reward).
Personal
accountability
to
t h e
i n d i v i d u a l s
w h o
control
resources
and
to
s o m e
e x t e n t
o t h e r
stakeholders.
His/ Her work is a form of amal salih (virtuous deed) which is then the key
for the attainment of blessings (true success in this world and in the
hereafter).
His/her work is also a form of ibadah (servitude to God) in so far as it is in
conformity with the divine norms and values.
The accountant who is imbued with the world-view of tawhid (oneness of
God) is not anti-profit or anti-worldly gain within the limits provided by
religion.
His vision of success and failure however extends beyond worldly existence
to the life in
the hereafter.
ii. Information about the Islamic banks economic resources and related
obligations to assist the users in: evaluating the adequacy of the Islamic
banks capital to absorb losses and business risks; assessing the risk
inherent in its investments and; evaluating the degree of liquidity of its
assets and the liquidity requirements for meeting its other obligations.
Islamic accounting practice takes place within the IFIs such as Islamic banks
and Zakat institutions, and it is essential to the running of these institutions.
Islamic accounting practice does not indicate that Islam mandate any particular
form of accounting.
However, the manifestation of Islamic faith simply implies that there are
particular forms of accounting to suit the needs of Islamic religious
requirements.
This is particularly true in the context of accounting practices in IFIs. The
prohibition of interest (riba) and the different forms of financing has led to
modified accounting treatments and disclosure requirements for Islamic
financial services.
This is manifested by the explanations and discussions of accounting for
various Islamic financial services and transactions.
Third, with the resurgence of Islam globally, the awareness for the need
of Islamic accounting arises.
Islamic accounting as a whole is able to serve the whole gamut of
stakeholders. Its principles do not serve the interest of any particular
group, but to the society as a whole which can make corporations
accountable for their actions and ensure they comply with Shariah
principles.
Auditing Standards
1. Objective and principles of auditing.
2. The Auditors Report.
3. Terms of Audit Engagement.
4. Testing for Compliance with Sharia Rules
and Principles by an External Auditor.
5. The Auditors Responsibility to Consider
Fraud and Error in an Audit of Financial
Statements.
Governance Standards
1. Sharia Supervisory Board: Appointment,
Composition and Report.
2. Sharia Review.
3. Internal Sharia Review.
4. Audit and Governance Committee for IFIs.
5. Independence of Sharia Supervisory Board.
6. Statement on Governance Principles for IFIs.
7. Corporate Social Responsibility.
Ethics Standards
1. Code of ethics for accountants and auditors of IFIs.
2. Code of ethics for employees of IFIs.
Sharia Standards
1. Trading in currencies.
2. Debit Card, Charge Card and Credit Card
3. Default in Payment by a Debtor.
4. Settlement of Debt by Set-Off.
5. Guarantees.
6. Conversion of a Conventional Bank to an Islamic Bank.
7. Hawala.
8. Murabaha to the Purchase Orderer.
9. Ijarah and Ijarah Muntahia Bittamleek.
10. Salam and Parallel Salam.
11. Istisnaa and Parallel Istisnaa.
12. Sharika (Musharaka) and Modern Corporations.
13. Mudaraba.
14. Documentary Credit.
15. Juala.
16. Commercial Papers.
17. Investment Sukuk.
18. Possession (Qabd).
19. Loan (Qard).
Accruals/Matching Concept:
AAOIFI does not particularly endorse the concept of substance over form.
In view of the primacy of contract in transactions in Islam, the emerging
reality must be constructed or appear to be as the form.
This is evident in the treatment of leased assets (Ijarah) and sales based
transactions (Murabahah). For Murabahah contracts, the essence of the
transaction is in fact a sales transactions.
Thus, the ownership title will be passed to the purchaser upon acquisition.
However, the financier or the bank can require the purchaser to pledge the
assets acquired as collateral to the financing amount.
The financier or the bank is prohibited to buy back the assets from the
purchaser.
Consistency Concept:
Materiality Concept:
Periodicity Concept:
The conventional accounting periodicity concept is also acceptable in Islam
on the basis that even in the case of Zakat, it is being paid once a year as a
period of measurement. The concept of haul determined that the wealth
must be owned at least one year to qualify for the payment of Zakat.
Thus, the periodicity concept for an Islamic financial institution means the
life of the institution can be broken into reporting periods to prepare
financial reports to the interested parties and stakeholders.
This will assist the users to periodically evaluate the institutions financial
performance and position. In addition, the periodic preparation of the
financial statements will be useful to determine the financial obligations and
the financial rights of the bank and other interested parties.
Thus, the life of the Islamic bank should be broken into reporting periods
to prepare financial reports that provide information to interested parties
about the performance of the bank. One lunar year is used for Zakat
calculation.