The deduction of Islamic law for the international harmonisation of accounting criterions has lucifer with the development of Islamic fiscal establishments and accounting criterions. There is the demand for standardisation on fiscal coverage patterns of Islamic concern organisation to run into the demands of the users, such as Islamic fiscal establishments. The paper are discoursing the differences or comparing the differences between the conventional Western and Islamic accounting criterions.
The readying of fiscal statements.
In Islam, the wellbeing of the Ummah or Islamic community is considered primary, but for the users of Western fiscal statements, their chiefly concern are to maximise net income and public-service corporation.
The prohibition on riba.
Conventional banking is based on the involvement rate spread between the depositors and the borrowers, the grosss and payment of involvement is improper in Islamic fiscal minutess. For Islamic banking, riba represent the foundations of Islamic concern agreements.
Acceptable Valuation Methods.
The acceptable rating methods used in conventional Western accounting are that future values are discounted to net present value by utilizing the price reduction rate ( estimated involvement rate ) . These rating methods are unacceptable in Islamic accounting because the hazard inherent in the uncertainness associated with the computations. In the footing for fiscal computations in an Islamic context, the clip value of money construct is non recognized.
The Qur’an required the payment of zakah. The major purpose of Islamic accounting criterions is to happen the accurate plus rating techniques for zakah. For conventional accounting patterns, assets should be valued at current market value. Muslim endeavors should be possible to choose appropriate options from those available in relevant international criterions in regard to accounting harmonisation.
Forbidden Business Activities.
There are out concern activities in Shari’a compliant accounting criterions such as minutess which involve in intoxicant, sale of porc, erotica and any unsure contracts, while in Western accounting patterns, the nature of concern are non of import.
Recognition and measuring.
In IAS 37, the liability is requires unwraping merely when these three conditions are present: I ) duty, two ) dependable measuring and three ) chance of an escape of resources. While in Islamic criterion, they merely recognize when the information are available indicate an event will ensue in the damage of plus.
In conformity with Shari’a jurisprudence, the Islamic accounting criterions are more focussed on the demands of Islamic users. The jurisprudence applies to all facets of Muslim life, including economic sciences and concern life and besides accounting rules and patterns. This could back up or reject the suggestion that in revising conventional criterions to run into the demands of Islamic law the subsequent criterions differ well from their original format and intent.
14. Accounting Postulates And Principles From An Islamic Position
The paper discuss about the compatibility of accounting posits and rules with Islamic Law and rules.
The concern and the proprietor are to be viewed as separate entity, income derived from concern is non deemed to be income of the proprietor but the concern itself. The fiscal accounting information shows the activities of the concern entity but non the proprietors. The posit is accepted in Islamic though, because Muslim law ( Fiqh ) is used to the thought of entity or nominal personality as it is the instance for gift ( Waaf ) , exchequer ( Baitul Mal ) and authorities.
The Going Concern Postulate.
Harmonizing to the posit, except the entity has face to settlement, it will go on for an limitless period of clip. Therefore, the fiscal statements are lone portion of a series of uninterrupted studies. However, many comptrollers disagreed and argued about this posit as an unreasoning and pathetic premise. This premise does non look to reject by any of the Islamic rules because there is a rule similar to this posit, the rule of “ retaining ” or “ accompaniment ” in Islamic law.
From the Islamic sentiment, there is a rule called conservativism rule. It states that when taking among two or more acceptable accounting patterns, some penchant is shown for the possibility that has the least favourable influence on the shareholders ‘ equity. Historical costs are acceptable if conservativism is acceptable. Therefore historical costs produce misinformation. Consequently to the conservativism rule, net incomes may be moved from one twelvemonth to another twelvemonth. Additionally, under this rule, rating of stock lists may minimise the base for Zakah. So, the conservativism rule is non well-matched with Islamic rules and regulations.
The Objectivity Principle.
The effectivity of fiscal information extremely depends on the dependability of the measuring technique used. The objectiveness rule has been depending on different elucidations as it is based on grounds and it is an impersonal step that no personal prejudice included. While from Islamic position, it is a coveted rule for fairness accounting, chiefly for entering different minutess.
The Matching Principle
The duplicate rule ( or convention ) states that disbursals should be recognized in the same period with gross. This is the most equal rules for fairness accounting from an Islamic point of position. As the rule allocates disbursals to their related grosss, it made the equity and justness available to stockholders and depositors in Muslim Bankss at one time. Without a uncertainty, it is the most importance in the apportioning the net incomes in instance of Islamic investing histories when many investible financess with different adulthoods is formed.
The Disclosure Principle.
There is a general harmoniousness in accounting that there should be just and equal revelation of accounting informations. It is expected that any affair of significance will be disclosed if it would impact the determination of an mean investor. From an Islamic point of view, equal revelation is besides one of the coveted rules for just accounting. It provides public with utile information for doing fiscal determinations. Zakah base value and its distribution can besides be accomplished as a result of this rule.
Although Islamic Bankss and conventional Bankss are operate in a different manner but it does n’t intend that they are perfectly different fiscal establishments which need different accounting. Difference accounting rules adopted by difference groups of fiscal establishments which their purposes and aims are besides difference. Hence, all rules and processs which keep equity and justness are adopted in accounting for lslamic Bankss.
15. The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks
Muslim Bankss have to bear by the open philosophies in Islam in carry oning their concern and fiscal minutess. They hire in-house spiritual advisers-Shari’a Supervisory Board ( SSB ) -who issues a particular study to inform the users of fiscal statements whether or non the bank has followed the Islamic rules. In recent times, the Financial Accounting Organization for Islamic Banks and Financial Institutions ( FAOIBFI ) has been set up to externally modulate the fiscal coverage by Muslim Bankss.
In modulating the fiscal coverage by Islamic Bankss, the FAOIBFI claims that “ Financial accounting plays an of import function in supplying the information which users of the fiscal statements of Islamic Bankss depend on in measuring the bank ‘s conformity with the principles of Shari’a. However, to execute this function efficaciously, accounting criterions need to be developed and complied with by Islamic Bankss. The development of such criterions must be based on clear aims of fiscal accounting and agreed upon definitions of its constructs ” ( FAOIBFI, 1993c, parity. 11, accent added ) .
After treatments which involved many difference parties such as Shari’a bookmans, it was agreed for following the aims of Western fiscal accounting that are appropriate for Muslim Bankss provided that any nonsubjective go againsting the Shari’a rules is excluded, for the development of aims. Harmonizing to Shari’a scholars the pattern of this attack is acceptable from a Shari’a position.
Muslim Bankss must stand by the Shari’a rules in their concern and fiscal minutess. An internal control procedures are set up by SSBs stated that Islamic Bankss have to assure users of their fiscal coverage that the minutess showed by the bank do non interrupt the Shari’a opinions.