International Management Review
Vol. 8 No. 2 2012
The Level of Compliance with AAOIFI Accounting Standards: Evidence from Bahrain Adel Mohammed Sarea College of Business and Finance, Ahlia University, Kingdom of Bahrain [Abstract] The objective of this paper is to explore the attitudes of accountants about the level of compliance with AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) accounting standards. Understanding the basic principles of accounting standards for Islamic Finical Institutions (IFIs) has become increasingly important among most Shari’ah scholars and researchers towards the implementation of accounting standards for IFIs. Currently, IFIs are one of the fastest growing sectors locally and globally. A review of the current framework of AAOIFI was undertaken to determine the level of compliance with AAOIFI accounting standards; the AAOIFI Framework for IFIs is currently the subject of much discussion and review. The findings of this paper, therefore, indicate that, Islamic banks of Bahrain have fully adopted the AAOIFI accounting standards. However, the contribution of this paper is to understand the conceptual framework of AAOIFI accounting standards and could benefit future research. [Keywords] Islamic accounting; accounting standards; AAOIFI; Islamic banks
Research Overview The Kingdom of Bahrain acting as the hub for many Islamic financial organizations to develop the Islamic banking and finance industry, including the International Islamic Financial Market (IIFM) and the Islamic International Rating Agency (IIRA), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the General Council for Islamic Banks and Financial Institutions (Ernst & Young, 2011). Islamic banks operate mainly in developing countries in the Middle East, Africa and South-East Asia and are facing some difficulties adopting unique accounting standards into their practice due to the absence of a legal framework and inconsistency of financial reporting. For instance, financial institutions in some countries, such as Jordan, the UAE and Qatar, are officially required to comply with the International Accounting Standards (IASs). Meanwhile, in countries such as Saudi Arabia, the authorities require compliance with both IAS and local accounting standards. In Malaysia, there are national accounting standards, which are based on IAS (Ahmed, 2002). In Bahrain, the authorities require compliance with both AAOIFI and IFRS as requested by central bank of Bahrain (CBB). The dilemma currently experienced in term of the divergence of accounting standards implementations poses a great threat to the sustainability of IFSs. For example, some of the Islamic banks treat investment accounts that are based on the mudarbah contract as liabilities and report them onbalance sheet (e.g. Jordan Islamic Bank, Bahrain Islamic Bank and Qatar Islamic Bank). Other banks treat investment accounts as fiduciary investments and, accordingly, report them as off-balance sheet (e.g. Al Rajhi Bank and Shamil Bank of Bahrain) (Ahmed, 2002). For those reasons, researchers in the area of financial reporting for Islamic financial institutions have conducted a considerable number of studies to investigate the issues of compliance with accounting standards and the need for a unique of accounting standards to be adopted by IFIs. For instance, Karim (1987), Abdel Magid (1981), Pomeranz (1997), Hameed, Alrazi and Nazli (2006), Che Pa (2006) and Shadia Rahman (2007) researchers have examined the understanding, acceptability, and level of compliance with accounting standards for Islamic financial institutions. The Afghani of the Islamic bank economist, Abdul Haqiqi, recommends that the establishment of accounting standards for of Islamic banks and a focus on auditing could possibly address the issue of accounting, conformity to Islamic and Arab social and religious objectives, and a coordinated and unified 27
International Management Review
Vol. 8 No. 2 2012
approach to the interpretation of pertinent Islamic law (Pomeranz, 1997). However, currently, the level of compliance with AAOIFI requirements is unknown and needs to be investigated because the absence of specific accounting standards for Islamic financial institutions being adopted globally could create some difficulties for users of financial reporting. In the light of the above discussion, review of the relevant studies that propagate the importance of accounting standards for Islamic financial institutions could clarify the research problem.
Research Problem Most previous studies have focused on the acceptability and understanding of AAOIFI accounting standards and the need for Islamic accounting standards. This study focused on the level of compliance with AAOIFI accounting standards. However, discourse is about the 'level of compliance” in which exist many scenarios that include high, moderate and low levels of compliance. To assist in the interpetations for the compliance issues, this research will focus on the investigation of the level of compliance with the AAOIFI accounting stnadards. It is undisputable that compliance with the AAOIFI accounting standards is necessary to ensure that all the matters of IFIs are within a legal framework which is acceptable for the Muslim community and in line with Shari’ah principles. The level of compliance issues get top priority in some of the previous studies, such as Hameed, Alrazi and Nazli (2006), Che Pa (2006) and Zaini (2007), Farah Nadzri (2009) and Mechelli (2009). Mechelli (2009) investigated both the degree of harmonization and compliance in applying IAS; the results of the research indicated a high degree of heterogeneity in applying IASB standards and a high degree of noncompliance with IAS 7 by Italian entities groups. The high degree of heterogeneity could impair the comparability of financial statements across entities. The high degree of noncompliance could, therefore, lead to the risk of misleading users of financial statements. In short, the evolving literature offers different interpretations: • High level of compliance with accounting standards: Hameed, et al (2006) stated that the complying level of Bank Islam Malaysia Berhad (BIMB) is 15 percent, while Bahrain Islamic Bank (BIB) 61 percent. Thus, it is indicated that the (BIB) in Bahrain has higher level of compliance with the AAOIFI accounting standards compared to the BIMB in Malaysia. • Moderate level of compliance with accounting standards: Che Pa (2006) and Zaini (2007) argue that the level of acceptability of AAOIFI have only a moderate level of compliance among the managers in Islamic banks in Malaysia. • Low level of compliance with accounting standards: Nadzri (2009) concluded that in regard to Zakah, the extents of disclosure by the IFIs are much lower than the AAOIFI requirements.
Research Methodology After reviewing the prior studies, we describe the research problem and then design research methodology. However, the literature review was considered to be beneficial to the analysis of the conceptual framework of AAOIFI standards. A survey consists of the whole accounting standards of AAOIFI as primary data and literature review, also considered as secondary data. Descriptive statistics have been conducted to analyze the questionnaire, as well as to explain the research objective and research questions. Thus, to support the analysis for the research objective and research question, the questionnaire is designed to obtain the accountants’ perceptions about the level of compliance with the AAOIFI accounting standards. However, most of the accountants believed that adopting or complying with the AAOIFI accounting standards can attract more investments, make financial statements more practical as well as relevant and enhances comparability. According to Sekaran (2000), sample sizes between 30 and 500 could be effective depending on the type of sampling design used and the research question investigated. Therefore, study of a sample rather than the entire population is also, sometimes, likely to produce more reliable results and a justifiable method which reduces the difficulties, such as cost and time (Cooper & Schindler, 2006). The sampling size of the study consists of a number of accountants in Bahrain. A total of 312 questionnaires were 28
International Management Review
Vol. 8 No. 2 2012
distributed to the accountants of the Islamic banks of Bahrain. Only 129 copies were returned to be examined, approximately 41%, which is sufficient for statistical reliability.
Research Findings This research is designed to evaluate perceptions concerning the level of compliance with AAOIFI accounting standards. For the purpose of the study, this research used the AAOIFI requirements based on AAOIFI accounting standards, which are published by Accounting and Auditing for Islamic financial institutions (AAOIFI). The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) prepares and issues accounting, auditing, and corporate governance standards, as well as ethics and Shari’ah standards, for Islamic financial institutions. AAOIFI has published 26 accounting standards (AAOIFI, 2010). However, summaries of findings are provided in Table 1, Table 2, and Table 3. Table 1 High Level of Compliance with AAOIFI Accounting Standards No
Statement
Mean
1
FAS No.1 requires that restricted investment accounts should be reported off-balance sheet in the statement of the changes in restricted investements. FAS No.2 Assets available for sale after acquisition on the basis of Murabahah shall be measured at their historical cost. FAS No.3 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for decline in the value of Mudarabah assets. FAS No.4 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for a loss of its capital in Musharaka financing transactions. FAS No.5 requires bank to disclose percentages for profit-allocation between investment account holders and the bank. FAS No.6 disclosure should be made, in the notes on significant accounts, of the percentage of the funds of unrestricted investment. FAS No.7 Parallel Salam transactions shall be recognized when the Islamic bank receives the capital of Salam transactions. FAS No.8 requires leased assets to be booked in an Ijarah Muntahia Bittamleek assets account and measured at book value. FAS No.10 requires that the Islamic bank shall disclose in its financial statements revenues and profits of Istisna’a contracts recognized for the financial period.
3.89
FAS No.11 require that the Islamic bank shall disclose in the notes any deductions, either as a percentage or an amount, from mudarabah income. FAS No.14 In the case of a change in accounting policies, a disclosure to this effect shall be made including the reasons. FAS No.16 requires that disclosures shall be made if the reporting currency is different from the local currency. The reasons for using a different currency shall be provided. FAS No.17 at the end of financial period, Sukuk held to maturity shall be measured at historical cost. FAS No.20 requires that the bank shall disclose in the notes to the financial statements the policy adopted in financing deferred payment sale transactions. FAS No.21 require that disclosures shall be made of the accounting policies adopted in the transfer of assets from unrestricted investment accounts to restricted investment accounts. FAS No.22 requires disclosure should be made regarding segment revenue and segment expense for each reportable segment. FAS No.23 requires consolidated financial statements shall be prepared by combining the financial statements of the IFI.
3.76
Total
4.01
2 3
4
5 6 7 8 9 10 11 12 13 14 15 16 17
3.62 4.10
4.03
4.05 4.10 4 4.12 4.04
4.05 4.11 4.13 4.11 3.97 4.07 4.06
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Vol. 8 No. 2 2012
A survey method was chosen to measure the level of compliance with the AAOIFI accounting standards. Respondents were required to rank their perceptions on the level of compliance of each standard based on five-point Likert scale analysis. Table 1 shows the list of accounting standards as suggested by AAOIFI requirements and indicates the perceptions of respondents regarding the level of compliance with AAOIFI accounting standards. Based on descriptive statistics have been conducted to evaluate the accountants’ perceptions about the level of compliance with AAOIFI accounting standards. Research findings revealed that 85% of the respondents agree with the AAOIFI accounting standards with high level of compliance, while only 5% of the respondents agree with moderate level of compliance with the AAOIFI accounting standards and 10 % of the respondents agree with low level of compliance with the AAOIFI accounting standards. The total mean score is 4.01, showing that most of the perceptions of the respondents are complying with the AAOIFI accounting standards. Based on the test conducted, Out of 20 AAOIFI accounting standards being tested, and seventeen items indicated high compliance with AAOIFI accounting standards. In short, FAS No.17 Sukuk: the highest mean scores of 4.13 realized representing the statement in paragraph 8 of the standard which indicated that Sukuk held to maturity shall be measured at historical cost at the end of financial period as well as the recognitions and measurements of Sukuk according fair value should be disclosed in the notes of financial statements. Thus, the expected result is that the respondents adopted FAS No.17 in their accounting practices. On the other hand, the second highest mean score on FAS No.8 about Ijarah Muntahia Bittamleek, which indicates that leased assets to be recorded in an Ijarah Muntahia Bittamleek assets account and measured at book value. Additionally, the third highest score is 4.11 percent, representing the FAS No. 20 and FAS No.16, which focus on deferred payment sale and disclosures of the reporting currency. The same table indicate that Bai' Bithaman Ajil are accepted to be implemented according to the perceptions of accountants, and Bai' Bithaman Ajil are transactions in line with Shari’ah principles to be adopted. With regard to FAS No.16, the reason for using a different currency shall be provided for more transparency. Furthermore, the accounting treatments based on AAOIFI requirements are related to disclosure issues; the disclosure standards based on AAOIFI requirements indicates, also, a high level of compliance. In this regard, Mudarabah assets, Musharaka financing, Salam transactions, and Istisn’a contracts are more understandable and acceptable to be implemented according to accountants' perceptions; due to that, these transactions are in line with shar’ah compliant to be adopted by Islamic banks. Generally, most of AAOIFI accounting standards have similar mean scores and high compliance with the AAOIFI accounting standards, such as FAS 5, FAS 6, FAS 7, FAS 8, FAS 10, FAS 11, FAS 14, FAS 16, FAS 21, FAS 22 and FAS 23. Based on those results, it can be concluded that the majority of accountant’s perceptions have a high level of compliance with the AAOIFI accounting standards with an overall mean scores of 4.01. Thus, the respondents rank the accounting standards treatment for the level of compliance with the AAOIFI accounting standards. Additionally, these findings reflect that the respondents in Bahrain are aware of the AAOIFI accounting measurements and disclosure standards. Table 2 Moderate Compliance with AAOIFI Accounting Standards No
Statement
Mean
1
FAS No.1 requires that unrestricted investment accounts be presented on the liabilities and equity in a separate section.
3.49
Table 2 shows FAS No.1 indicates that unrestricted investment accounts be presented on the liabilities and equity in a separate section are accaptable with a moderate level of complaince among accountants in Bahrain. Out of 20 AAOIFI accounintg standards, there is only one moderate level of compliance with a mean score of 3.49.
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Table 3 Low Compliance with AAOIFI Accounting Standards No
Statement
Mean
1 2
FAS No.9 requires that zakah should be treated as expenses. FAS No.9 requires that unpaid zakah should be treated as liabilities. Total
2.46 2.38 2.42
AAOIFI FAS No.9 consist of 21 paragraphs that describe measurements, recognition, and disclosure requirements, as well as setting out accounting rules for the treatments related to the determination of the Zakah base (i.e., the base on Zakah is to be computed), measurement of items included in the Zakah base and disclosure of Zakah in the financial statements of the Islamic banks and financial Institutions (AAOIFI, 2008). The two statements from FAS No.9 clarify that; Zakat that have been tested indicated that the relatively low mean score is 2.46 and 2.38 representing the FAS No.9. The results presented above show that the mean scores of the overall respondents are relatively low. The reason for this might be due to religious necessities. These findings are in line with Nadzri (2009), who found that the mean result of AAOIFI FAS NO.9 Zakah is relatively low to suggest full compliance with the AAOIFI.
Conclusion Due to the rapid growth of the Islamic Capital Market (ICM), compliance with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards is becoming increasingly subject to being investigated among Islamic Financial Institutions. In reference to data analysis, the results further show high level of compliance with AAOIFI accounting standards in the kingdom of Bahrain according to accountants' perceptions. This is due to their consistency with the regulation imposed by the regulatory bodies in Bahrain, such as Central Bank of Bahrain (CBB). Generally, most of AAOIFI accounting standards have similar mean scores and a high level of compliance with the AAOIFI accounting standards. On the other hand, this paper provides additional evidence to evaluate and measure the level of compliance with AAOIFI accounting standards. Additionally, the contribution of this paper is to understand the framework of AAOIFI accounting standards and the requirements of AAOIFI standards to be adopted among Islamic Financial Institutions globally.
References AAOIFI. (2008). Financial accounting standards. Accounting and Auditing Organization for Islamic Financial Institutions, Manama, Bahrain. AAOIFI. (2010). Financial accounting standards. Accounting and Auditing Organization for Islamic Financial Institutions. Manama, Bahrain. Abdel-Magid, M. F. (1981). The theory of Islamic banking: Accounting implications. The International Journal of Accounting, 17(1), 79-102. Ahmed, E. (2002). Accounting issues for Islamic banks. In Archer, S. and Rifaat Ahmed Abdel Karim (ed.). Islamic finance Innovation and Growth. Euro money books and AAOIFI: Nestor House. London. Che, Pa, A. (2006). An exploratory study on the understanding and accounting for Islamic bonds: perspective of Malaysian bank managers. (Master thesis). International Islamic University Malaysia. Ernst & Young (2011). Islamic funds & investments report 2011, Achieving growth in challenging Times. The 7th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2011), IFIR 2011, with a principal focus on “achieving growth in challenging times” Hameed, S., Wirman, A., Alrazi, B., Nazli, M., & Pramono, N. (2006). Alternative disclosure and performance measures for Islamic banks. International Islamic University Malaysia. Retrieved from http://www.iiu.edu.my/iaw/Students/ 31
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Karim, R. A., & Tomkins, C. (1987). The Shari’ah and its implications for Islamic financial analysis: An opportunity to study interactions among society, organization, and accounting. The American Journal of Islamic Social Sciences. 4(1), 101-115. Mechell, Alessandro. (2009). Accounting harmonization and compliance in applying IASB standards: An empirical survey about the first time adoption of IAS 7 by Italian listed groups. Accounting in Europe, 6(2), 231-270. Nadzri, F. (2006). Roles and impacts of accounting and auditing organization for Islamic financial institutions (AAOIFI) in dealing with the accounting and disclosure of Zakah and interest (Riba). Thesis, Master of Business, AUT University. Pomeranz, F. (1997). The accounting and auditing organization for Islamic financial institutions: An important regulatory debut. Journal of International Accounting, Auditing & Taxation, 6(1), 123130. Shadia, R. (2007). Islamic accounting standards. Retrieved from http://islamic-finance.net/islamicaccounting/acctg5.html. pp. 1-9. Sekran Uma. (2000). Research methods for business: A skill-building approach. 3rd Edition, John Willey & Sons, lnc. New York. Zaini, N. (2007). An exploratory study on the understanding of AAOIFI accounting standards for investment in Islamic bonds: The case of Malaysian’s accounting academics. (Master thesis). International Islamic University Malaysia.
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The Level of Compliance with AAOIFI Accounting Standards: Evidence from Bahrain Adel Mohammed Sarea College of Business and Finance, Ahlia University, Kingdom of Bahrain [Abstract] The objective of this paper is to explore the attitudes of accountants about the level of compliance with AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) accounting standards. Understanding the basic principles of accounting standards for Islamic Finical Institutions (IFIs) has become increasingly important among most Shari’ah scholars and researchers towards the implementation of accounting standards for IFIs. Currently, IFIs are one of the fastest growing sectors locally and globally. A review of the current framework of AAOIFI was undertaken to determine the level of compliance with AAOIFI accounting standards; the AAOIFI Framework for IFIs is currently the subject of much discussion and review. The findings of this paper, therefore, indicate that, Islamic banks of Bahrain have fully adopted the AAOIFI accounting standards. However, the contribution of this paper is to understand the conceptual framework of AAOIFI accounting standards and could benefit future research. [Keywords] Islamic accounting; accounting standards; AAOIFI; Islamic banks
Research Overview The Kingdom of Bahrain acting as the hub for many Islamic financial organizations to develop the Islamic banking and finance industry, including the International Islamic Financial Market (IIFM) and the Islamic International Rating Agency (IIRA), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and the General Council for Islamic Banks and Financial Institutions (Ernst & Young, 2011). Islamic banks operate mainly in developing countries in the Middle East, Africa and South-East Asia and are facing some difficulties adopting unique accounting standards into their practice due to the absence of a legal framework and inconsistency of financial reporting. For instance, financial institutions in some countries, such as Jordan, the UAE and Qatar, are officially required to comply with the International Accounting Standards (IASs). Meanwhile, in countries such as Saudi Arabia, the authorities require compliance with both IAS and local accounting standards. In Malaysia, there are national accounting standards, which are based on IAS (Ahmed, 2002). In Bahrain, the authorities require compliance with both AAOIFI and IFRS as requested by central bank of Bahrain (CBB). The dilemma currently experienced in term of the divergence of accounting standards implementations poses a great threat to the sustainability of IFSs. For example, some of the Islamic banks treat investment accounts that are based on the mudarbah contract as liabilities and report them onbalance sheet (e.g. Jordan Islamic Bank, Bahrain Islamic Bank and Qatar Islamic Bank). Other banks treat investment accounts as fiduciary investments and, accordingly, report them as off-balance sheet (e.g. Al Rajhi Bank and Shamil Bank of Bahrain) (Ahmed, 2002). For those reasons, researchers in the area of financial reporting for Islamic financial institutions have conducted a considerable number of studies to investigate the issues of compliance with accounting standards and the need for a unique of accounting standards to be adopted by IFIs. For instance, Karim (1987), Abdel Magid (1981), Pomeranz (1997), Hameed, Alrazi and Nazli (2006), Che Pa (2006) and Shadia Rahman (2007) researchers have examined the understanding, acceptability, and level of compliance with accounting standards for Islamic financial institutions. The Afghani of the Islamic bank economist, Abdul Haqiqi, recommends that the establishment of accounting standards for of Islamic banks and a focus on auditing could possibly address the issue of accounting, conformity to Islamic and Arab social and religious objectives, and a coordinated and unified 27
International Management Review
Vol. 8 No. 2 2012
approach to the interpretation of pertinent Islamic law (Pomeranz, 1997). However, currently, the level of compliance with AAOIFI requirements is unknown and needs to be investigated because the absence of specific accounting standards for Islamic financial institutions being adopted globally could create some difficulties for users of financial reporting. In the light of the above discussion, review of the relevant studies that propagate the importance of accounting standards for Islamic financial institutions could clarify the research problem.
Research Problem Most previous studies have focused on the acceptability and understanding of AAOIFI accounting standards and the need for Islamic accounting standards. This study focused on the level of compliance with AAOIFI accounting standards. However, discourse is about the 'level of compliance” in which exist many scenarios that include high, moderate and low levels of compliance. To assist in the interpetations for the compliance issues, this research will focus on the investigation of the level of compliance with the AAOIFI accounting stnadards. It is undisputable that compliance with the AAOIFI accounting standards is necessary to ensure that all the matters of IFIs are within a legal framework which is acceptable for the Muslim community and in line with Shari’ah principles. The level of compliance issues get top priority in some of the previous studies, such as Hameed, Alrazi and Nazli (2006), Che Pa (2006) and Zaini (2007), Farah Nadzri (2009) and Mechelli (2009). Mechelli (2009) investigated both the degree of harmonization and compliance in applying IAS; the results of the research indicated a high degree of heterogeneity in applying IASB standards and a high degree of noncompliance with IAS 7 by Italian entities groups. The high degree of heterogeneity could impair the comparability of financial statements across entities. The high degree of noncompliance could, therefore, lead to the risk of misleading users of financial statements. In short, the evolving literature offers different interpretations: • High level of compliance with accounting standards: Hameed, et al (2006) stated that the complying level of Bank Islam Malaysia Berhad (BIMB) is 15 percent, while Bahrain Islamic Bank (BIB) 61 percent. Thus, it is indicated that the (BIB) in Bahrain has higher level of compliance with the AAOIFI accounting standards compared to the BIMB in Malaysia. • Moderate level of compliance with accounting standards: Che Pa (2006) and Zaini (2007) argue that the level of acceptability of AAOIFI have only a moderate level of compliance among the managers in Islamic banks in Malaysia. • Low level of compliance with accounting standards: Nadzri (2009) concluded that in regard to Zakah, the extents of disclosure by the IFIs are much lower than the AAOIFI requirements.
Research Methodology After reviewing the prior studies, we describe the research problem and then design research methodology. However, the literature review was considered to be beneficial to the analysis of the conceptual framework of AAOIFI standards. A survey consists of the whole accounting standards of AAOIFI as primary data and literature review, also considered as secondary data. Descriptive statistics have been conducted to analyze the questionnaire, as well as to explain the research objective and research questions. Thus, to support the analysis for the research objective and research question, the questionnaire is designed to obtain the accountants’ perceptions about the level of compliance with the AAOIFI accounting standards. However, most of the accountants believed that adopting or complying with the AAOIFI accounting standards can attract more investments, make financial statements more practical as well as relevant and enhances comparability. According to Sekaran (2000), sample sizes between 30 and 500 could be effective depending on the type of sampling design used and the research question investigated. Therefore, study of a sample rather than the entire population is also, sometimes, likely to produce more reliable results and a justifiable method which reduces the difficulties, such as cost and time (Cooper & Schindler, 2006). The sampling size of the study consists of a number of accountants in Bahrain. A total of 312 questionnaires were 28
International Management Review
Vol. 8 No. 2 2012
distributed to the accountants of the Islamic banks of Bahrain. Only 129 copies were returned to be examined, approximately 41%, which is sufficient for statistical reliability.
Research Findings This research is designed to evaluate perceptions concerning the level of compliance with AAOIFI accounting standards. For the purpose of the study, this research used the AAOIFI requirements based on AAOIFI accounting standards, which are published by Accounting and Auditing for Islamic financial institutions (AAOIFI). The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) prepares and issues accounting, auditing, and corporate governance standards, as well as ethics and Shari’ah standards, for Islamic financial institutions. AAOIFI has published 26 accounting standards (AAOIFI, 2010). However, summaries of findings are provided in Table 1, Table 2, and Table 3. Table 1 High Level of Compliance with AAOIFI Accounting Standards No
Statement
Mean
1
FAS No.1 requires that restricted investment accounts should be reported off-balance sheet in the statement of the changes in restricted investements. FAS No.2 Assets available for sale after acquisition on the basis of Murabahah shall be measured at their historical cost. FAS No.3 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for decline in the value of Mudarabah assets. FAS No.4 disclosure should be made in the notes to the financial statements for a financial reporting period if the Islamic bank has made during that period a provision for a loss of its capital in Musharaka financing transactions. FAS No.5 requires bank to disclose percentages for profit-allocation between investment account holders and the bank. FAS No.6 disclosure should be made, in the notes on significant accounts, of the percentage of the funds of unrestricted investment. FAS No.7 Parallel Salam transactions shall be recognized when the Islamic bank receives the capital of Salam transactions. FAS No.8 requires leased assets to be booked in an Ijarah Muntahia Bittamleek assets account and measured at book value. FAS No.10 requires that the Islamic bank shall disclose in its financial statements revenues and profits of Istisna’a contracts recognized for the financial period.
3.89
FAS No.11 require that the Islamic bank shall disclose in the notes any deductions, either as a percentage or an amount, from mudarabah income. FAS No.14 In the case of a change in accounting policies, a disclosure to this effect shall be made including the reasons. FAS No.16 requires that disclosures shall be made if the reporting currency is different from the local currency. The reasons for using a different currency shall be provided. FAS No.17 at the end of financial period, Sukuk held to maturity shall be measured at historical cost. FAS No.20 requires that the bank shall disclose in the notes to the financial statements the policy adopted in financing deferred payment sale transactions. FAS No.21 require that disclosures shall be made of the accounting policies adopted in the transfer of assets from unrestricted investment accounts to restricted investment accounts. FAS No.22 requires disclosure should be made regarding segment revenue and segment expense for each reportable segment. FAS No.23 requires consolidated financial statements shall be prepared by combining the financial statements of the IFI.
3.76
Total
4.01
2 3
4
5 6 7 8 9 10 11 12 13 14 15 16 17
3.62 4.10
4.03
4.05 4.10 4 4.12 4.04
4.05 4.11 4.13 4.11 3.97 4.07 4.06
29
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A survey method was chosen to measure the level of compliance with the AAOIFI accounting standards. Respondents were required to rank their perceptions on the level of compliance of each standard based on five-point Likert scale analysis. Table 1 shows the list of accounting standards as suggested by AAOIFI requirements and indicates the perceptions of respondents regarding the level of compliance with AAOIFI accounting standards. Based on descriptive statistics have been conducted to evaluate the accountants’ perceptions about the level of compliance with AAOIFI accounting standards. Research findings revealed that 85% of the respondents agree with the AAOIFI accounting standards with high level of compliance, while only 5% of the respondents agree with moderate level of compliance with the AAOIFI accounting standards and 10 % of the respondents agree with low level of compliance with the AAOIFI accounting standards. The total mean score is 4.01, showing that most of the perceptions of the respondents are complying with the AAOIFI accounting standards. Based on the test conducted, Out of 20 AAOIFI accounting standards being tested, and seventeen items indicated high compliance with AAOIFI accounting standards. In short, FAS No.17 Sukuk: the highest mean scores of 4.13 realized representing the statement in paragraph 8 of the standard which indicated that Sukuk held to maturity shall be measured at historical cost at the end of financial period as well as the recognitions and measurements of Sukuk according fair value should be disclosed in the notes of financial statements. Thus, the expected result is that the respondents adopted FAS No.17 in their accounting practices. On the other hand, the second highest mean score on FAS No.8 about Ijarah Muntahia Bittamleek, which indicates that leased assets to be recorded in an Ijarah Muntahia Bittamleek assets account and measured at book value. Additionally, the third highest score is 4.11 percent, representing the FAS No. 20 and FAS No.16, which focus on deferred payment sale and disclosures of the reporting currency. The same table indicate that Bai' Bithaman Ajil are accepted to be implemented according to the perceptions of accountants, and Bai' Bithaman Ajil are transactions in line with Shari’ah principles to be adopted. With regard to FAS No.16, the reason for using a different currency shall be provided for more transparency. Furthermore, the accounting treatments based on AAOIFI requirements are related to disclosure issues; the disclosure standards based on AAOIFI requirements indicates, also, a high level of compliance. In this regard, Mudarabah assets, Musharaka financing, Salam transactions, and Istisn’a contracts are more understandable and acceptable to be implemented according to accountants' perceptions; due to that, these transactions are in line with shar’ah compliant to be adopted by Islamic banks. Generally, most of AAOIFI accounting standards have similar mean scores and high compliance with the AAOIFI accounting standards, such as FAS 5, FAS 6, FAS 7, FAS 8, FAS 10, FAS 11, FAS 14, FAS 16, FAS 21, FAS 22 and FAS 23. Based on those results, it can be concluded that the majority of accountant’s perceptions have a high level of compliance with the AAOIFI accounting standards with an overall mean scores of 4.01. Thus, the respondents rank the accounting standards treatment for the level of compliance with the AAOIFI accounting standards. Additionally, these findings reflect that the respondents in Bahrain are aware of the AAOIFI accounting measurements and disclosure standards. Table 2 Moderate Compliance with AAOIFI Accounting Standards No
Statement
Mean
1
FAS No.1 requires that unrestricted investment accounts be presented on the liabilities and equity in a separate section.
3.49
Table 2 shows FAS No.1 indicates that unrestricted investment accounts be presented on the liabilities and equity in a separate section are accaptable with a moderate level of complaince among accountants in Bahrain. Out of 20 AAOIFI accounintg standards, there is only one moderate level of compliance with a mean score of 3.49.
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Table 3 Low Compliance with AAOIFI Accounting Standards No
Statement
Mean
1 2
FAS No.9 requires that zakah should be treated as expenses. FAS No.9 requires that unpaid zakah should be treated as liabilities. Total
2.46 2.38 2.42
AAOIFI FAS No.9 consist of 21 paragraphs that describe measurements, recognition, and disclosure requirements, as well as setting out accounting rules for the treatments related to the determination of the Zakah base (i.e., the base on Zakah is to be computed), measurement of items included in the Zakah base and disclosure of Zakah in the financial statements of the Islamic banks and financial Institutions (AAOIFI, 2008). The two statements from FAS No.9 clarify that; Zakat that have been tested indicated that the relatively low mean score is 2.46 and 2.38 representing the FAS No.9. The results presented above show that the mean scores of the overall respondents are relatively low. The reason for this might be due to religious necessities. These findings are in line with Nadzri (2009), who found that the mean result of AAOIFI FAS NO.9 Zakah is relatively low to suggest full compliance with the AAOIFI.
Conclusion Due to the rapid growth of the Islamic Capital Market (ICM), compliance with the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) standards is becoming increasingly subject to being investigated among Islamic Financial Institutions. In reference to data analysis, the results further show high level of compliance with AAOIFI accounting standards in the kingdom of Bahrain according to accountants' perceptions. This is due to their consistency with the regulation imposed by the regulatory bodies in Bahrain, such as Central Bank of Bahrain (CBB). Generally, most of AAOIFI accounting standards have similar mean scores and a high level of compliance with the AAOIFI accounting standards. On the other hand, this paper provides additional evidence to evaluate and measure the level of compliance with AAOIFI accounting standards. Additionally, the contribution of this paper is to understand the framework of AAOIFI accounting standards and the requirements of AAOIFI standards to be adopted among Islamic Financial Institutions globally.
References AAOIFI. (2008). Financial accounting standards. Accounting and Auditing Organization for Islamic Financial Institutions, Manama, Bahrain. AAOIFI. (2010). Financial accounting standards. Accounting and Auditing Organization for Islamic Financial Institutions. Manama, Bahrain. Abdel-Magid, M. F. (1981). The theory of Islamic banking: Accounting implications. The International Journal of Accounting, 17(1), 79-102. Ahmed, E. (2002). Accounting issues for Islamic banks. In Archer, S. and Rifaat Ahmed Abdel Karim (ed.). Islamic finance Innovation and Growth. Euro money books and AAOIFI: Nestor House. London. Che, Pa, A. (2006). An exploratory study on the understanding and accounting for Islamic bonds: perspective of Malaysian bank managers. (Master thesis). International Islamic University Malaysia. Ernst & Young (2011). Islamic funds & investments report 2011, Achieving growth in challenging Times. The 7th Annual World Islamic Funds and Financial Markets Conference (WIFFMC 2011), IFIR 2011, with a principal focus on “achieving growth in challenging times” Hameed, S., Wirman, A., Alrazi, B., Nazli, M., & Pramono, N. (2006). Alternative disclosure and performance measures for Islamic banks. International Islamic University Malaysia. Retrieved from http://www.iiu.edu.my/iaw/Students/ 31
International Management Review
Vol. 8 No. 2 2012
Karim, R. A., & Tomkins, C. (1987). The Shari’ah and its implications for Islamic financial analysis: An opportunity to study interactions among society, organization, and accounting. The American Journal of Islamic Social Sciences. 4(1), 101-115. Mechell, Alessandro. (2009). Accounting harmonization and compliance in applying IASB standards: An empirical survey about the first time adoption of IAS 7 by Italian listed groups. Accounting in Europe, 6(2), 231-270. Nadzri, F. (2006). Roles and impacts of accounting and auditing organization for Islamic financial institutions (AAOIFI) in dealing with the accounting and disclosure of Zakah and interest (Riba). Thesis, Master of Business, AUT University. Pomeranz, F. (1997). The accounting and auditing organization for Islamic financial institutions: An important regulatory debut. Journal of International Accounting, Auditing & Taxation, 6(1), 123130. Shadia, R. (2007). Islamic accounting standards. Retrieved from http://islamic-finance.net/islamicaccounting/acctg5.html. pp. 1-9. Sekran Uma. (2000). Research methods for business: A skill-building approach. 3rd Edition, John Willey & Sons, lnc. New York. Zaini, N. (2007). An exploratory study on the understanding of AAOIFI accounting standards for investment in Islamic bonds: The case of Malaysian’s accounting academics. (Master thesis). International Islamic University Malaysia.
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ISLAMIC JURISPRUDENCE: WHOSE LAW IS IT ANYWAY? Dr. Mohd Daud Bakar Managing Director Amanie Islamic Finance Learning Centre LLC
Dr. Mohd Daud Bakar Managing Director Amanie Islamic Finance Learning Centre Amanie Islamic Finance Learning Centre LLC LLC DIFC, Dubai
1
ISLAMIC JURISPRUDENCE: PRINCIPLESBASED OR RULE-BASED? • Islamic Jurisprudence, or fiqh, is the jurists’ understanding of the sources of the law which are given or revealed. • Unlike any other legal systems, fiqh is guided by a set of principles which are Revealed and Divine (i.e. Shariah). • All in all, Islamic jurisprudence is the result of inter-play between principles which are Divine and legal rulings which are of jurists’ interpretation. It is the manifestation of the intended rulings and laws of Allah which are constructed by qualified jurists. 2
Cont’d • Is Islamic jurisprudence principle or rule based? The answer is that Islamic jurisprudence consists of both principle(s) and rule(s) as Islamic jurisprudence is void if it lacks any supporting principles.
3
TABLE OF COMPARISON BETWEEN SHARIAH PRINCIPLES AND ISLAMIC JURISPRUDENCE RULINGS Shariah Principles/Divine 1.
Prohibition of Riba
2.
(Interest)
Fiqh Rulings/Human 1.
Riba takes place in cash or in kind.
Prohibition of Gharar (Uncertainty)
2.
Gharar in unilateral contract (tabar’uat) is tolerable
3.
Delivery of the subject matter
3.
Delivery could be actual or constructive
4.
Possession of the subject matter
4.
While some jurists disallow a sale of an asset prior to its possession, some would allow this except for some identified goods. 4
ISLAMIC JURISPRUDENCE VIS-À-VIS ENGLISH COMMON LAW AND EUROPEAN CIVIL LAW • Common law is a case-law orientation which is based on inductive approach. A number of cases decided by the court may ‘create’ a principle of law which shall be upheld by the lower court unless a “distinguishing” or “obiter dicta” can be established. In short, common law is a rule-based which may develop into principles of law. Thus, law report is very critical in common law-based judiciary. • Civil law, on another hand, is based on principles of law from the very beginning. Thus, it is deductive in approach. Statutes and textbooks are relatively more important that cases decided by the court. In short, it is of principle-based and known as jurists’ law.
5
Cont’d • Islamic law, ironically speaking, combines these two approaches as it starts from Divine principles but allow the jurists to interpret the principles. Guided by the broad methodologies of these principles, the Muslim jurists are allowed to opine on matters of law.
6
ILLUSTRATION OF BOTH INDUCTIVE AND DEDUCTIVE APPROACHES IN ISLAMIC LAW • The Shariah principles prohibit ‘riba’ be it taking or paying. The Shariah principles also disallow any transaction that may trigger the ‘ratio decidendi’ or riba prohibition such as rescheduling the sale tenor for an increase in the selling price. The jurists simply deduce these rulings from the existing Divine Texts (i.e. principlebased. • Issue: Can a defaulter in Murabahah Sale (the buyer) restructure this transaction through an ijarah mechanism i.e. the buyer will sell the asset to the seller/financier at a price which is equivalent to the outstanding murabahah sale price to set-off against the debt of murabahah. Thereafter, the seller/financier will lease back the same asset to the buyer/customer according to new terms of period, lease payment and option to purchase or wa’d to sell.
7
Cont’d • Issues to be considered: a) b)
c) d)
Will this lead to sell and buy-back under the prohibited ‘inah sale? Will this ruling be different if the clause of restructuring has been incorporated in the agreement under “Event of Default”? Would the ‘wa’d’ to sell the asset back to the seller/financier be problematic? Would the increase of payment be viewed as similar to increase of payment in rescheduling arrangement?
8
HOW DO THE MODERN LAWYERS DEAL WITH THIS ISLAMIC LAW CONSTRUCTION? • Best scenario: Documentation must incorporate almost all relevant principles and rules governing a particular financing arrangement to avoid ‘lacuna’ and to allow the judges (as well as the parties to the dispute) to bring in new interpretation that may not be intended by the parties when they entered into this transaction. • Normal scenario: a) b) c) d)
Waiver clause of interest. AAOIFI Shariah Standards. Expert opinion. Arbitration. 9
PROPOSAL FOR THE FUTURE • Standard documentation. • Practical and comprehensive textbook for lawyers and judges. • Commentary and illustration to Shariah standards of AAOIFI. • Islamic Finance Law Reports.
10
THANK YOU Amanie Islamic Finance Learning Centre L.L.C. No. 44, Level 41, Emirates Towers Sheikh Zayed Road P.O. Box 31303 Dubai UAE Tel: +971 4 319 7688 Fax: +971 4 330 3365 Website: www.amaniedubai.com
11
Dr. Mohd Daud Bakar Managing Director Amanie Islamic Finance Learning Centre Amanie Islamic Finance Learning Centre LLC LLC DIFC, Dubai
1
ISLAMIC JURISPRUDENCE: PRINCIPLESBASED OR RULE-BASED? • Islamic Jurisprudence, or fiqh, is the jurists’ understanding of the sources of the law which are given or revealed. • Unlike any other legal systems, fiqh is guided by a set of principles which are Revealed and Divine (i.e. Shariah). • All in all, Islamic jurisprudence is the result of inter-play between principles which are Divine and legal rulings which are of jurists’ interpretation. It is the manifestation of the intended rulings and laws of Allah which are constructed by qualified jurists. 2
Cont’d • Is Islamic jurisprudence principle or rule based? The answer is that Islamic jurisprudence consists of both principle(s) and rule(s) as Islamic jurisprudence is void if it lacks any supporting principles.
3
TABLE OF COMPARISON BETWEEN SHARIAH PRINCIPLES AND ISLAMIC JURISPRUDENCE RULINGS Shariah Principles/Divine 1.
Prohibition of Riba
2.
(Interest)
Fiqh Rulings/Human 1.
Riba takes place in cash or in kind.
Prohibition of Gharar (Uncertainty)
2.
Gharar in unilateral contract (tabar’uat) is tolerable
3.
Delivery of the subject matter
3.
Delivery could be actual or constructive
4.
Possession of the subject matter
4.
While some jurists disallow a sale of an asset prior to its possession, some would allow this except for some identified goods. 4
ISLAMIC JURISPRUDENCE VIS-À-VIS ENGLISH COMMON LAW AND EUROPEAN CIVIL LAW • Common law is a case-law orientation which is based on inductive approach. A number of cases decided by the court may ‘create’ a principle of law which shall be upheld by the lower court unless a “distinguishing” or “obiter dicta” can be established. In short, common law is a rule-based which may develop into principles of law. Thus, law report is very critical in common law-based judiciary. • Civil law, on another hand, is based on principles of law from the very beginning. Thus, it is deductive in approach. Statutes and textbooks are relatively more important that cases decided by the court. In short, it is of principle-based and known as jurists’ law.
5
Cont’d • Islamic law, ironically speaking, combines these two approaches as it starts from Divine principles but allow the jurists to interpret the principles. Guided by the broad methodologies of these principles, the Muslim jurists are allowed to opine on matters of law.
6
ILLUSTRATION OF BOTH INDUCTIVE AND DEDUCTIVE APPROACHES IN ISLAMIC LAW • The Shariah principles prohibit ‘riba’ be it taking or paying. The Shariah principles also disallow any transaction that may trigger the ‘ratio decidendi’ or riba prohibition such as rescheduling the sale tenor for an increase in the selling price. The jurists simply deduce these rulings from the existing Divine Texts (i.e. principlebased. • Issue: Can a defaulter in Murabahah Sale (the buyer) restructure this transaction through an ijarah mechanism i.e. the buyer will sell the asset to the seller/financier at a price which is equivalent to the outstanding murabahah sale price to set-off against the debt of murabahah. Thereafter, the seller/financier will lease back the same asset to the buyer/customer according to new terms of period, lease payment and option to purchase or wa’d to sell.
7
Cont’d • Issues to be considered: a) b)
c) d)
Will this lead to sell and buy-back under the prohibited ‘inah sale? Will this ruling be different if the clause of restructuring has been incorporated in the agreement under “Event of Default”? Would the ‘wa’d’ to sell the asset back to the seller/financier be problematic? Would the increase of payment be viewed as similar to increase of payment in rescheduling arrangement?
8
HOW DO THE MODERN LAWYERS DEAL WITH THIS ISLAMIC LAW CONSTRUCTION? • Best scenario: Documentation must incorporate almost all relevant principles and rules governing a particular financing arrangement to avoid ‘lacuna’ and to allow the judges (as well as the parties to the dispute) to bring in new interpretation that may not be intended by the parties when they entered into this transaction. • Normal scenario: a) b) c) d)
Waiver clause of interest. AAOIFI Shariah Standards. Expert opinion. Arbitration. 9
PROPOSAL FOR THE FUTURE • Standard documentation. • Practical and comprehensive textbook for lawyers and judges. • Commentary and illustration to Shariah standards of AAOIFI. • Islamic Finance Law Reports.
10
THANK YOU Amanie Islamic Finance Learning Centre L.L.C. No. 44, Level 41, Emirates Towers Sheikh Zayed Road P.O. Box 31303 Dubai UAE Tel: +971 4 319 7688 Fax: +971 4 330 3365 Website: www.amaniedubai.com
11
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Download Aaoifi Shariah Standards Pdf Software Download
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Highest industry standards in index design and governance. The foundation of FTSE’s global. AAOIFI Accreditation As a member of the Accounting and Auditing Organization. Significant exclusions with close to 60% of software and computing services companies ineligible for the index. 0 20% 40% 60% 80% 100% Weight. Demystification of the Selected AAOIFI Shari’ah Standards 3-Day Master Class (17-19 May 2015). Shaban is a Consultant at BIBF and the Head of Shariah Compliance of T’azur takaful company and a member of Shari’a Board of takaful Oman and is a seasoned consultant. Demystification of the Selected AAOIFI Shari’ah Standards 3-Day Master Class (17-19 May 2015). Shaban is a Consultant at BIBF and the Head of Shariah Compliance of T’azur takaful company and a member of Shari’a Board of takaful Oman and is a seasoned consultant.