Alternative accounting standards sought

The Islamic financial industry needs a corresponding alternative set of accounting standards which can best be harmonised, not standardised due to the different nature and activities of the Islamic banks and financial institutions, says an accounting expert.
"These standards already exist, developed by AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions). The International Accounting Standards Board (IASB) should reconsider its position and allow alternatives live and let live, just as there is a need for differential reporting requirements for small and medium businesses," says Associate Professor Dr Shahul Hameed Mohamed Ibrahim of International Centre for Education in Islamic Finance (Inceif).
Dr Shahul, a qualified accountant now with Inceif's department of finance and accounting, moderated an Inceif discussion series on Friday. Malaysian Institute of Accountants (MIA) Nik Mohd Hasyudeen Yusoff, who was the key speaker at the series, said International Financial Reporting Standards (IFRS) were developed by IASB as a single set of high quality, understandable and internationally-recognised financial reporting standards.
"The IFRS concept and operational model demonstrates the ability of Shariah-compliant structures to co-exist with the conventional framework," he said, according to an Inceif statement.
PricewaterhouseCoopers partner Mohammad Faiz Azmi and Amanie Business Solutions Sdn Bhd principal consultant Dr Syed Musa Alhabshi were the two commentators at the discussion series.
Nik Hasyudeen added that as Islamic finance transactions are backed by productive assets, structured through contracts within the same legal framework with conventional transactions, there is no likelihood that such transactions cannot be accounted for using the IFRS.
In any occasion, he said the contracts entered into by the parties should ensure that the principles of Shariah are complied with. Commending the efforts of AAOIFI, Nik Hasyudeen suggests the Bahrain-based organisation to consider working with and compliments IASB in ensuring the convergence incorporates the Islamic finance agenda.
"This does not mean that IFRS is perfect and the accounting standards developed by AAOIFI are inferior," he said, adding that serious participation in the development and enhancement of the IFRS by promoters of Islamic finance could influence the acceptance of the values and principles promoted by Islamic finance into the IFRS.
The AAOIFI standards are not intended to fully replace the IFRS but merely cover those standards and transactions that IFRS does not.
In most cases the differences between the IFRS and AAOIFI's standards are more apparent than real, the statement said. IASB's refusal to recognise the AAOIFI standards has resulted in Islamic financial institutions in countries such as Bahrain which adopts the latter's standards, having to have their financial statements qualified by auditors who are affiliated to IASB.
Auditors affiliated to IASB through the International Federation of Accountants (IFAC) are obligated to enforce IFRS, it added.
IFRS is currently mandatory for all domestic listed entities in 85 countries and encouraged in 113 countries including Malaysia. The AAOIFI's standards, which have yet to be widely accepted, are seriously being considered by countries in the Gulf and Malaysia.

(This story appeared in The Malaysian Reserve on May 26, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)