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MAC4013 ACCOUNTING FRAMEWORK
TOPIC 9TOPIC 9
ISLAMIC ACCOUNTINGISLAMIC ACCOUNTING
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Learning Objectives:
Need for Islamic Accounting Islamic Values and Implications for Islamic
Economics
Conventional Accounting and MainstreamEconomics
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 wic are in conflict wit
its values !Ali" #$$%& 'an #$$(). Adopting or modifying conventional accounting concepts is deemed
insufficient to develop an accounting system wic consistent witIslamic norms towards Islamic ob*ectives
+rowing of te Islamic ban,ing industry in te global economics !'arim"#$$- and Roy #$$#). ameed et al. !#$$/) 0 many organi1ations are see,ing funding from
Islamic ban,s operated in line wit te 2ari3a.
Establisment of Islamic organi1ations in many Muslim countries witIslamic ob*ectives reinforces te need for Islamic accounting.
In Malaysia" te establisment of 4an, Islam Malaysia 4erad !4IM4)led to rapid growt in Islamic ban,ing operations 5 introduction astructural framewor, 5 Islamic ban,ing financial reporting practices avebeen regulated by te 4NM" te 4an,ing and 6inancial Institutions Act!4A6IA). te Islamic 4an,ing Act #$7/" Companies Act #$89 andapplicable MA24 2tandards.
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Iss$e &: Is"a#ic 'an(ing Services
Islamic ban,s and oter financial institutions tatprovide Islamic ban,ing services ave beenrelying eavily on te prevailing guidelines issuedby 4NM" sari3a rulings issued by 2ari3a
advisors appointed by te respective ban,s. is practice as raised some concerns !MA24"
;--;:
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Iss$e 2: Lac( ! a C!*erent ra#e+!r(
Absence of a proper set of accounting standardsfor te recognition" measurement and disclosure
of Islamic based transactions.
e e=isting MA24 standards ave not been ableto address accounting issues witin Islamic
ban,ing operations ade>uately !MA24" ;--;).
2aul ameed" ;--# said Islamic accounting
needs to be broad based covering all Islamicbusiness" government and voluntary
organisations.
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Acc!$nting: C!nventi!na" vs Is"a#ic
'asis Is"a#ic Acc!$nting C!nventi!na" Acc!$nting
Objectives Islamic accountability
6ala and maslaa
2ocial welfare orientation
?ecision usefulness for investors"creditors& capital mar,et orientation
Users 2ociety" 2ta,eolders Mar,et players" 6inance providers
ec!gniti!n 2ocio0economic events"include e=ternalities" e=cludesaria proibition
Monetarily measurable Internaleconomic events
Meas$re#ent Monetary @
Non0monetary4alanced score card
Current valuation
Monetary
istoric cost
.isc"!s$re 2aria compliance
2ocio0economic
All material3 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 te notion of accountability into
conventional accounting may meet significantresistance as te Bbusiness case as not been
successful.
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C*ristian t*!$g*t vs1 Is"a#ic ec!n!#ics
e reason for tis is due to te Cristian focus on teetics of interest is premised on te conse>uences of
individual actions on individuals wereas te Islamic
etics focuses on te social conse>uences of collective
actions. us" wile bot condemned te practice" te reason
for te dissatisfaction was dissimilar toug it could be
said tat bot regard economic *ustice as a social good.
owever" te Islamic viewpoint ta,es on a broader
institutionali1ed public accountability.
It is vital to appreciate te nature of Islamic economics
and ence accounting.
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$nda#enta" Is"a#ic 4a"$es
4elieve in +od e Dur3an
Man as te Vicegrant
e roibition of Interest
e payment of a portion of one3s wealt" 1a,at"
to te 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
Coudury !;--;): epistemology of Fneness of+od and sari3a.
9 ma*or Islamic economic and financialinstruments:Abolition of interest
rofit0saring under economic cooperation betweenlabour and capital
Goint venture" principally toug not wolly trouge>uity participation
e institution of carity
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 te c!##$nit6 !r s!ciet6 at large isa critical aspect of te Islamic perspective.
ence a sift to te Islamic perspective is e=pected to
increase focus on accountability and e=panding te
currently narrow focus of responsibility of reportingentities to a wider sta,eolder group.
e implications of Islamic economics can be seen in
te following:
6ull disclosure" eriodicity" Records" Concept of materiality"
Concept of reliability" resentation and 6orms of accounting
reports" Hnderstanding of BAssets and
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Is"a#ic Acc!$nting: '$siness 7t*ics
e paramount rule in business is onesty andfair dealing !ussain" #$$$)
A Muslim business person sould as ig
moral values and never e=ploit oters. roibit monopolies and price fi=ing.
6ree mar,et and not sub*ect to manipulation.
eople will not be e=ploited by te more powerful inbusiness transactions.
4eave e>uitably" no defect iding" no lier" no
stealing goods and oarding.
S
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Is"a#ic Acc!$nting: S!cia"
Acc!$ntabi"it6
e word esab !account) is repeated moretan 7 times in different verses in te Dur3an.
Account is te root of accounting
Fne3s obligation to account3 to +od on allmatters pertaining to uman endeavour forwic every Muslims is accountable.
All resources made available to individuals are
made so in te form of trust. Individuals are trustees for wat tey ave been
given by Alla in te form of goods" property andless tangible assets.
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Is"a#ic Acc!$nting: Acc!$ntabi"it6
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Is"a#ic Acc!$nting: $"" disc"!s$re
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Is"a#ic Acc!$nting: ec!rds
'eep record of indebtedness 2;:;7;.. Jen you contract a debt for a fi=ed period" put in in
writing.
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Ot*er Is"a#ic Acc!$nting Attrib$tes
eriodicity Materiality
Reliability
resentation
6inancial Accounting Reports
Assets and
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C!#0atibi"it6 ! Acc!$nting C!nce0ts
Accrual basis for recogni1ing revenue ande=penses in terms of amounts e=pected to bereceived in te future would seem to pose somedifficulties for Islamic Institutions. Conservatism
using te lowest values of assets and te igestvalues of e=penses
Reporting e=penses sooner tan later
Recognising revenues later tan sooner Matcing
Recogni1ing e=penses in te same period asassociated revenues
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I#0"icati!ns ! $sing Accr$a" 'asis
Ka,at payment Mali,i 2cool" loans !including unearned revenue)
are e=empt from 1a,at
Mudaraba principle 2afii 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 tis concept.
Accountability o Alla and Hmma
o conclude: Islamic Accounting: A Jay 6orward
e accountability based framewor, 5 relation between e
accountor" te supplier of te accounting information and te
accountee" te users of te accounting information. 6airness is viewed as te fundamental goal tat accoutning
strives to acieve.
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!"es ! MAS'
MA243s efforts in formulating Islamic accountingstandards.
MA2432 efforts currently may be significantly
diverted to maintaining congruency wit teIA24 framewor, for conventional accounting.
Maintaining dual accounting conceptual
framewor, may be a callenge for te national
standard setter.
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MAC4013 ACCOUNTING FRAMEWORK
7nd ! T!0ic 97nd ! T!0ic 9