Islamic Accounting Theory /Islamic Accounting Department/STEI Tazkia/SFL

Topic : Accounting and Islamic worldview, Accounting concepts: An

Islamic perspective, Direction of learning in (conventional)
accounting theory
Learning : Students are able to answer review questions properly about the
Objectives topics
References : Chp 1, 2 AR and Scott Chp 1
Activities : Quiz
No Write the Concepts/Definitions Letters Statements
appropriate
Letter
1 Islamic accountability A All business activities must be ethical and
have good morals
2 Background the B Indonesia does not permit LIFO method
existence of for inventory (as in IAS 2 also does not
conventional allowed to use LIFO method. While some
accounting countries in the US still allow the method.
3 Stewardship theory C Accounting as a service from the manager
to the trustee
4 Cash equivalent value D Lease are classified as finance leases when
they meet certain conditions, such as the
lease term covers at least 75% of the total
economic life of the leased goods
5 Islamic worldview E More principle rather than rule based
6 Accounting is a F Measurement basis for Zakah calculation
product of its
environment
7 Falah G Managers “managing” information
released to increase the value of stocks
8 How to achive falah H Accounting (earnings) can measure
manager’s performance

9 Accounting for I Managers may approve a negative NPV

decision usefulness projects
10 Adverse Selection J Leases are categorized as finance leases
when the benefits and risks of the leased
goods substantially transfer to the lessee.
11 Moral Hazard K Separation between owners and
management of the company
12 Accounting for L The success of the world and the hereafter
efficient contracts
13 Compensation contract M Every single cent we record, we will be
accountable to Allah SWT in the day of
Judgment
14 IFRS N Accounting information help investors to
make better investment decision
15 Principle based O Accounting creates trust through debt
covenant, so lowering debt costs

16 Rule based P The world is temporary, hereafter is the

ultimate goal and man is created as a
caliph who accounted for all deeds in the
world to Allah SWT
 Islamic Accounting Theory /Islamic Accounting Department/STEI Tazkia/SFL

Choose one answer that is NOT correct

1. The accounting objectives form the Qur’an 2: 282:

a. Proper, complete and transparent recording of financial and business transactions
by responsible accountants
b. Written contract especially for a debt contract.
c. At least 2 truthful witnesses to provide a check and balance mechanism
d. Accounting only records and reports transactions that have material value
e. Fear God (Allah) for all the contractual parties including the witnesses and the
accountant
2. Conventional and Islamic accounting
a. Islamic accounting recognition: accrual and cash
b. Islamic accounting measurement: toward current value
c. Conventional accounting disclosure: adequate disclosure
d. Conventional accounting recognition: accrual only
e. Conventional accounting measurement: toward current value
3. Qualitative characteristic of accounting information
a. Understandable
b. Comparability
c. Relevance
d. Reliability
e. Conservatism
4. What should accountants do, considering the “bad history” of their profession, like
Enron, Subprime Mortgage etc?
a. More transparent
b. Allow off balance sheet for special transactions
c. Using current value instead of relying on historical value
d. Disclosing information for mandatory purposes
5. Variation of current values
a. Cash equivalent value
b. Fair value
c. Exit value
d. Opportunity cost
e. Historical value
6. What is information asymmetry?
a. Insiders know better than outsiders
b. Managers serve shareholders to reduce agency problems
c. Bad actions of managers cannot be observed by shareholders
d. Lenders cannot observed decisions of managers that might be create lenders’
loss
e. Managers delay to release information for their benefits
 Islamic Accounting Theory /Islamic Accounting Department/STEI Tazkia/SFL

Explain and provide opinion about accounting concepts below, are they acceptable in Islam
(based on AAOIFI rules)

NO Accounting Concepts Acceptable Unacceptable

1 Accounting entity
2 Going concern
3 Periodicity
4 Monetary unit
5 Accrual
6 Matching costs and revenues
7 Cost principle
 Islamic Accounting Theory /Islamic Accounting Department/STEI Tazkia/SFL

Topic : Accounting under ideal conditions

Learning Objectives : Students are able analyse an ideal market condition and its
impact on accounting
 Students are able to explain historical vs current values
 Student are able to calculate and analysis fair value for
given cases
References : Scott Chp 2
Activities :  Info Search
 QA sesión
 Small team presentation

Key Points

1. Ideal conditions - Certainty

a. No chance to earn abnormal returns
b. Lack of information asymmetry
c. Complete and perfect market of economy
d. Future cash flows are known

2. Present value model under ideal condition -> application of TVM

a. Concept of the difference in value of money because of the difference in time
IDR 1000,- now is more value than IDR 1000 next year
Why the value of money is different because of the time difference?
# inflation
# tax regulation
# political situation, etc
b. TVM represents “time preference” of economic agents in holding “money”
 Conventional: human preference is only driven by him/herself,
to maximize his / her utility.
As Qur’an said; Al Aadiyaat: 8 , Al Ma’arij: 19-21
 Islamic:
a. Human has a need as an individual as “fitrah”. However
how to meet that need, he is not free to do anything he
wants. Because he is limited by Aqidah, Sharia and
Akhlaq
b. Wealth : not "how much" or "when". But more
important is "for what", “how much benefit of our
property”
“The best of men are human beings that are beneficial
to other human beings” HR. Ahmad, ath-Thabrani, ad-
Daruqutni.
c. TVM is irrelevant
 Islamic Accounting Theory /Islamic Accounting Department/STEI Tazkia/SFL

An extreme case : you will still invest even if there is no

return, the reason is that your investment has provided
benefit for the unemployed so you can work and
support the ummah (see moslem sociopreneur)
d. For planning purposes, replace r with cost of capital
c. When PV is working under ideal condition, we can prepare financial
statements in advance, expected = realization
# future dividend, cash flows, profits are known
3. Present Value Under Uncertainty
a. Weather, government policies, strikes, equipment breakdown, advanced
technology  affect future cash flows
b. Considering probability because of state of nature (bad or good economy)
c. Future cash flows are known conditionally on state realization
d. Expected need income is not same as realization  abnormal earnings
e. An example of uncertainty: RRA (psak 29 akuntansi minyak dan gas bumi
provide choices to Successful Efforts (expenses when incurred – more certain)
or Full cost (part of asset – uncertain)

Discuss in a group of 5, and explain in front of the class

1. Compare between Historical vs Current Value in terms of:

a. Relevance vs Reliable
b. Recognition lag (lag between revenue recognition and real economic value)
c. Matching costs and revenues
d. How to make historical cost useful?
2. A true net income does not exist under real world condition. (see
https://hbr.org/2018/02/why-financial-statements-dont-work-for-digital-companies)