The Impact of the Islamic Religion on the Harmonisation of International Accounting Standards

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The Impact of the Islamic Religion on the Harmonisation of International Accounting Standards

Justin Lingard – S200990
October 2010
Table of Contents
Introduction4
User requirements of financial reports5
IFRS Compliance Issues with Shari ‘a law6
Riba6
Gharar7
Zakat7
Conclusion8
References10

Introduction
Islam is the world’s second largest religion with over 1.65 billion followers, which constitutes 24% of the world’s population (Kettani, 2010). Islam is a religion that encompasses all aspects of a Muslim’s life, from issues of an ethical, social and civil nature to economic and legal matters. In this way it is quite different to the secular view normally held in the West, which separates business decisions from religious consideration. The rules that govern Islam are called Shari’a law. Shari’a law comprises of two main writings, the Qur’an and the Sunnah. The primary source is the Qur’an and it is believed to be the words of god as revealed to the Prophet Muhammad (peace be upon him (PBUH)). The second source is the Sunnah which contains God inspired acts, sayings of the prophet (PBUH) and acts of the prophet’s (PBUH) companions to which he was uncritical. In addition to these two sources, the Ijma are pronouncements representing the consensus of Islamic scholars on matters not covered in the Qur’an or Sunnah (Hamid et al, 1993). The Ijma are interpretations which are obviously subjective, and as such several different forms of Islam have emerged, each based upon different interpretations. Islamic Financial Institutions (IFIs) have arisen due to Muslims’ need for Shari’a compliant banking. Due to the different nature and activities of these IFIs, specialised standards are required. The not for profit Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in 1991 to create such specialised standards. AAOIFI will use International Financial Reporting Standards (IFRS) where there is no conflict with Shari ‘a law. Standards that don’t comply will be modified, and where there are no IFRS to cover specific Islamic banking practises, new standards will be developed (Ibrahim and Hameed, 2007). Most IFIs have their own Shari’a Supervisory Boards which oversee that the actions of the bank are in line with Shari’a law. Western accounting standards are based on the philosophy of economic rationalism. They take a secular view towards economics and business in that they are able to separate them from religious consideration (Baydoun and Willett, 2000).Western economics and accounting theory is based upon the principles of wealth maximisation and acting in the self interest and its focus is on reporting to capital markets. This is very different to Islam. This paper discusses whether the push towards the international harmonisation of accounting standards currently being undertaken by the International Accounting Standards Board (IASB) is compatible with Islam. It will focus on two main points; whether Western Financial Reports meet the requirements of Muslim users, and the compliance issues between IFRS and Shari’a law. User requirements of financial reports

There are two main schools of thought as to how Islamic accounting standards should be developed (Maurer, 2002, Lewis, 2001, Vinnicombe and Park, 2007). One is that practises from conventional accounting can be taken and adapted to fit Islam (the AAOIFI uses this approach). Some Islamic scholars reject this approach and argue a second approach, that because Islam covers all aspects of life that accounting standards should be created for Islam rather than be adapted from IFRS to be compliant (Vinnicombe and Park, 2007). Baydoun and Willett (2000) use the first approach by taking Islamic standards, which they view to be too conservative, and altering them to what they believe is what Islamic users should want. They conclude that in order to fulfil the needs of Muslim users that a value added statement (VAS)...
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