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ISLAMIC ACCOUNTING FRAMEWORK

Compatibility of Accounting Concepts


Accrual versus cash basis

-Assigning revenue to the fiscal year in which it was earned rather than to that in which it was received would have two implications: i. in terms of the payment of the zakat, the institution may pay zakat for wealth not yet received ii. Second the mudarabah principle underlying investment accounts involves distribution of a cash profit

Compatibility of Accounting Concepts


If the recognition of income earned were

to be made on accrual basis, distribution of profit would required Islamic banks to advance cash from other sources. If loss, bank would have to use its own fund to compensate the depositor. Its violates mudarabah contract whereby loss should be borne by the owners of the capital. Islamic banks used cash basis rather than accrual basis.

Compatibility of Accounting Concepts


Substance over forms i. primacy of contract in transactions in

Islam leads to the belief that the emerging reality must be constructed or be represented to be the form. ii. In Islam metaphysics, the nature of the things is determined by its relationship and actions by its place in the process. iii. Issue on substance over forms needs to be clearly articulate.

Compatibility of Accounting Concepts


Accountability

Property and resources are held in trust from God and one must ultimately account to God as how well they have been employed. ii. Two important philosophy are concept of full disclosure and social accountability. Which is different to conventional accounting framework that focus on information usefulness and cost benefit.
i.

Compatibility of Accounting Concepts


Accountability

iiiprime obligation is to the umma(community) but conventional framework focuses on investors and creditors.

THE CONCEPTUAL FRAMEWORK


Should be based on the provision of the

syariah. It is observed that two approaches generally adopted: i. Establish objectives based on the spirit of Islam and its teaching and then consider these established objectives in relation to conventional accounting thought. ii. Start with objectives establish in conventional acct thought, test them against Islamic Syariah and accept

Comparison btw AAOIFI and MASB i-1


Objectives a) AAOIFI- on the process of financial

acc. b) MASB i-1- on the outcome of the financial acc process. State that the general purpose of the financial statements is to provide information about the financial position, performance and cash flows of Islamic Fin Inst. Its draw the attention towards mgt stewardship and the degree of

Comparison btw AAOIFI and MASB i-1


Cash versus Accrual basis

a) AAOIFI-allows both cash and accrual

basis. b) MASB i-1- requires IFI prepare fs under accrual basis unless approved by National Syariah Advisory Council. c) Fiqh experts have determined that cash basis of accounting was the appropriate mode for the Islamic transaction in the past. But accrual basis is most appropriate under

Comparison btw AAOIFI and MASB i-1


Substance over form not yet been

discussed. Disclosure of income a) AAOIFI requires income statement to differentiate income by type, those are unrestricted investment, restricted investment, fees and other income. b) Also a requirement to assign expenses to the respective income with the disclosure of material.

Comparison btw AAOIFI and MASB i-1


c) Disclosure of the prohibited earnings and expenditure is required together with the disclosure of material. d) MASB i-1- analysis of income acording to the types of investment and financing of customers be presented in the notes to the fs.

Comparison btw AAOIFI and MASB i-1


Distinguishing sources of finance

AAOIFI i. requires sources of finance (restricted or unrestricted investment) of each assets to be disclosed. ii. Not consider restricted investment account as part of the capital employed and should be disclosed on separate statement, consistent with AAOIFI definition of assets. iii. Unrestricted investment account is made distinct from deposits and liabilities.

Comparison btw AAOIFI and MASB i-1


iv In Malaysian all deposit (current, general and special investment) form part of the capital employed and classified as liabilities. MASB I-1 i. encourage additional disclosure for special investment account. ii. Classification of deposits as liabilities

Comparison btw MASB 1and MASB i-1


Additional statements-similarity

Purpose of fs to assist users in making economic decision and mgt stewardship. ii. Responsibility to prepare fs lies on the hand of BOD or governing body.
i.

Comparison btw AAOIFI and MASB i-1


Mandatory

a) Zakat fund statement

- Zakat for company to be determined based on companys net assets. - If the bank responsible for collection and distribution of the zakat, then statement detailing the sources of fund, uses of fund and its balance as at the end of an accounting period would be more appropriate.

Comparison btw AAOIFI and MASB i-1


b) Qard fund statement

Provides information regarding sources of fund, uses of fund during a period and a fund balance as at a given date. - Qard is a non interest bearing loan intended to allow the borrower to use the loaned funds for a period of time with the understanding that the same amount of the loaned funds would be repaid at the end of the period (AAOIFI)
-

Comparison btw AAOIFI and MASB i-1


c) Additional disclosure: income

statement - MASB i-1 requires that an analysis of income be presented in accordance to the contract used in the operations of an Islamic business enterprise. The contract includes mudarabah, musyrakah, wadiah, ijarah murabahah and bai bithaman ajil

Comparison btw AAOIFI and MASB i-1


d) Prescribed by MASB i-1 to ensure

conformity with the syariah requirements. The information regarding syariah board, zakat obligation and prohibited earnings or expenses. e) Fair presentation and non-compliance - Refer to page 239.