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Comparative Analysis of Reporting Practices of Islamic Financial

The document compares the reporting practices of Islamic financial institutions using AAOIFI standards versus IFRS standards. It analyzes annual reports of Islamic banks in the UK, Malaysia, and Bahrain. While IFRS are widely adopted globally, AAOIFI standards were introduced for Islamic financial institutions to be Shariah-compliant. Some key differences identified include treatment of murabaha contracts, mudarabah, ijarah leases, and accounting for zakat. Adopting AAOIFI standards may make Islamic banks less competitive in capital markets that require IFRS reporting.

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Abdul Maroof
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70 views16 pages

Comparative Analysis of Reporting Practices of Islamic Financial

The document compares the reporting practices of Islamic financial institutions using AAOIFI standards versus IFRS standards. It analyzes annual reports of Islamic banks in the UK, Malaysia, and Bahrain. While IFRS are widely adopted globally, AAOIFI standards were introduced for Islamic financial institutions to be Shariah-compliant. Some key differences identified include treatment of murabaha contracts, mudarabah, ijarah leases, and accounting for zakat. Adopting AAOIFI standards may make Islamic banks less competitive in capital markets that require IFRS reporting.

Uploaded by

Abdul Maroof
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Comparative Analysis of

Reporting Practices of
The University of
Lahore
Respected Sir:
Abdur Rasheed Mirza
Presented By:
Awais Awan
S. Muhammad Mehran Zahid Naqvi

M.Com 4th Semester(Evening).


Introduction
• How major financial transactions were recognized,
measured & presented by Islamic financial
institutions in their annual reports?
• Are the recognition, measurement and presentations
of these financial transactions by Islamic financial
institutions are acceptable to IFRS/IAS accounting
framework?
• Took a sample size of Islamic financial institutions
based in UK, Malaysia and Bahrain and analyzed
their reporting practices & standards of their financial
statement.
• IFRS standards are widely used in the world.
90 countries have fully adopted whereas, 120
countries around the world either permit or
require IFRS standards.
• Some of the IFRS were no sufficient for all the
sections of business of the largest Islamic financial
institutions because they were not shariah compliant
so new Islamic financial reporting standards were
introduced by the Bahrain based accounting and
auditing organization of Islamic financial
institutions (AAOIFI). It published the shariah
compliant accounting standards and these standards
have full authority in Dubai, South Africa & Syria.
Methodology & Model
• The author has reviewed the financial statements of
Islamic bank of Briton, UK that has adopted the IFRS
for the reporting of its financial statements.

• Bank Islam Malaysia Berhad, which uses financial


reporting standards issued by Malaysian Accounting
Standard Board (M.A.S.B) that has amended some of
the IFRS for reporting purposes.

• Whereas Bahrain based Bahrain Islamic bank uses


AAOFI standards for its financial reporting.
Literature Review
 Islamic financial institutions have growth rate of 20%
per annum.
 Islamic assets size have grown to $1.6 trillion with
revenue of £120 billion in 2012.
 All Islamic financial transaction should be free from:
• Riba.
• Gambling & speculations.
• Uncertainty.
• Exploitation & unfairness.
 FATWA’S
•For the clarification purpose in the financial
Transactions.
•People argue that FATWAS relate to Islamic
financial transactions are subject to the different
interpretations.

AAOFI standards have full implementation in:


•Dubai
•South Africa
•Syria
•Pakistan states that some of the Islamic
accounting standards are adopted from AAOIFI.
 IASB wishes to have universal financial
accounting standards globally, but by adopting
AAOIFI standards Islamic financial
institutions may present a challenge to the
global acceptance of IFRS.

 It is not possible of Islamic financial


institutions to completely adopt IFRS.
 IFRS contradicts shariah ruling in Islamic
financial transactions such as:

• Zakat.
• Istasna.
• Parallel istasna contracts.
• Murabaha.
• Ijarah.
• Ijarah Muntahla Bittamaleek.
• Restricted mudarbah contracts.
 Contrary to AAOFI standards, Malaysia
accounting standard board (MASB) requires
its Islamic financial institutions to use IFRS
for reporting purpose.

 Two researchers named Azmi and Faizal said


that instead of adopting AAOIFI standards it is
easy to make amends in IFRS and then apply
them in Islamic financial institutions.
 Supporters of AAOIFI standards present their
reasons for adopting AAOIFI standards which
are mentioned
AAOIFI
below: IFRS

Profits on murabahah are recognized Under IFRS these are required to be


equally over contractual terms. measured at using the interest rate
method.
Mudarbah transactions are treated as IFRS on recognizes five elements in
sixth element in financial statement. financial statement i.e. income,
expense, asset, liability, equity.
Under AAOFI standards Ijarah leases Under IFRS it is considered as finance
are treated as operating lease. lease.
Islam does not allow interest. IFRS often require entities to discount
the future cash flows to measure the
value of asset and liability.
AAOFI has standards accounting IFRS does not have any accounting
standards on corporate zakat. standards on corporate zakat.
Findings
 IFRS is recognized globally.
 Completely implemented in EU for publically listed
companies.
 If Islamic financial institutions adopt AAOIFI standards
then it will be difficult for them to compete in the capital
markets such as in EU.
 Also, the other difficulty the Islamic financial institutions
might face by adopting AAOIFI standards is that the
investor might raise questions about the completeness,
effectiveness, reliability and comparability of the
financial statements prepared using AAOIFI as compared
to IFRS.
Substance over Form
• Benefit of leasing is that companies acquire fixed or
noncurrent assets and without owning the assets they
enjoy the full benefits of that asset. Any lease that
transfer substantially all risks and rewards to the lease
holder should be treated as finance lease as required
by IAS 17. In the financial statement of the
shareholder, finance lease is treated as noncurrent
asset in the asset side and liability on the other side of
the financial statement. Islamic finance treats the
leasing not a finance lease but an operating lease.
Murabaha Contracts
• When bank finances murabaha contract with murabeh
(beneficiary), bank is required to disclose the cost
plus profit margin to murabeh. Then after agreeing to
the price, the murabeh repays this sale price in
installment over the agreed period. To recognize this
receivable transaction over the agreed time period
most Islamic financial institutions uses straight line
methods which is not permissible under IAS 17,
because under IAS 17 any fixed installment paid by
the lessee to the lesser to be divided into loan and
capital repayment by using effective interest rate
method.
Thank U……………………:D

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