Islamic Accounting and Reporting - Case Study Example

Question Introduction International accounting has made tremendous improvement in the world of today. The benefits of international accounting make their contribution to the standardization of the business practice. There are effects of the standardization process in the field of business. The fields that are commonly affected are the economic environment of the business. The uniformity of the management of the accounting standards will result to the liquidity and also the division of labor. It will cause a reduction in the cost of the transaction by the investors. A lower cost in the capital requirements will also be recorded as a result of the standardization of the accounts (Archer & Karim 2007, p.7). The standardization of the accounting methods will also see a reduction in cost, this will in return cause an increase In foreign investments and also in the cross listings. There is a wide range of difference between the national rules of accounting and the IFRS which stands for the international financial reporting standards. The difference includes the measurement, disclosure of rules and also the rules on incorporating recognition. The idea behind the standardization process is the development and agreement of the technical standards of accounting (Ayub 2007, p.21).  Discussion Standardization of accounting treatment has several benefits that are associated with them. Firstly this method allows for compatibility. The great advantage when the accounting standards of the world are in a single set. There is comparability when different companies that are located in different counties are involved. At the present situations, there is much difference between the accounting standards of different countries. It becomes difficult for an investor to compare the investments as he or she must reconcile with the different companies on the same basis of the accounting methods. This challenge is also similar to the creditors. It becomes a challenge to access the creditworthiness of two companies that have the same economies as they may seem different (Al-omar & Abdel-haq 1996, p.43).  When a set of standards that are similar have been enacted, the accounting standards will enable comparisons on an equal basis. This would make things easier for the small businesses to be able to evaluate the available options for international investments and also cash management. Many small businesses have inadequate resources to enable them to compare and contrast the variables that are available for the domestic or international investments. It would be simpler for the owners of these businesses to compare these options if the financial statements were similar (Ariff & Iqbal 2011, p.24).  Another advantage of the standardizations is the international expansions. When there is a single set in the world’s financial standards it would be easier for the companies to expand. There are challenges to encounter with when companies wish to expand internationally. They have to incur the cost of compliance. This means that the companies have to adopt another set of accounting methods. This is to enable them meet the requirements of the new country. This cost is twice the amount the company spends in the accounting cost they already have. Small businesses are charged with high amount of money enable them to expand to new countries (Coulson 1978, p.34).  Another benefit that would be associated with standardization of the accounting methods is the creation of a central authoritative body. The creation of common accounting methods may place the authority of making these rules are placed in a single body. There are different methods of setting standards in different countries. There is also an international body that sets these rules (El-gamal 2006, p.45).  When a single set of standards are developed it would reduce the disagreements between the countries involved. It will also reduce the disagreements between the international regulators. It would also cut cost involved in the expanding business internationally. There are some cases when businesses would be required to pay a fee to aid in setting these standards. This may not have an impact on big companies but may affect the small business ventures (Eisen 2007, p.64). IASB that is the short form independent standard-setting body is a plan based on IFRS. IASB has various standard activities. One of these setting activities is seeking to publish and formulate accounting standards. They also help in promoting acceptance all over the world of the accounting standards. IASB has plays a role in setting activities of seeking to improve as well standardizing the accounting, regulations, procedures and standards. However, IASB does not appear to believe in the many reasons providing why various countries should differ in their accounting standards. IASB helps its member states to take the responsibility of publishing and developing the IFRS (Ayub 2007, p.26).  In fulfillment of its standard setting responsibilities, the IASB uses a thorough, transparent and open procedure of publishing the consultative documents. These documents include exposure drafts as well discussion papers. ASB also engages in close range with the world’s stakeholders. These stakeholders include the analysts, business leaders, investors, accounting standard setters, the accountancy profession as well as the regulators. The IASB’s interpretive body is the IFRIS committee that deals the role of interpretation. This committee comprises of fourteen voting members who are the appointees of the trustees. They are from various countries and they also hold distinct professional backgrounds (Hanif 2012, p.88).  This IFRIS committee discharges the duties and responsibilities of reviewing the issues that have been spread widely of accounting on a timely basis. These issues include the latest issues that may have arisen within the IFRIS’s context. They consequently help the IASB to offer an authoritative guidance concerning the stated issues. This committee holds its meetings in public and on the webcast. The interpretations offered by the IASB are enhanced by the committee that they get to the targeted group within the shortest time possible. This is achieved by the committee working closely with national committees similar to the interpretation committee. These national committees have, however, must meet the characteristics of openness, thorough as well transparency in all its due processes (Nasir 2009, p.34).  The AAOIFI was developed back in year 1991 by the financial institutions of the Islamic society as well as several other parties. The main role of the organization was to set international accounting, as well as the international auditing standards for all the Islamic financial firms. However, the organization had to formulate its concepts as per the Shariah precepts. It takes various activities related to standard setting. One of the activities that AAOIFI deals in as far as the standard setting is involved is improving the sharia boards’ operations. This is achieved by strengthening the scholar’s certification process according to Fakih (Naʻīm 2002, p.45).  This organization also identifies and puts into practice the ways that will foster the rise of new and young generation who will trigger the consistency in the organization. This is achieved by making this young generation pass through a scholarly program such as training courses. AAOIFI also plays a role of balancing the opposition that arises as a result of the change. This is achieved by the involvement of a wide range of industry interests. Debates are used for the accomplishment of this strategy where meaningful and rigorous discussions are carried out. This debate involves both the scholars as well as all the Islamic finance participants. The debate provides the AAOIFI organization with ideas on how well to formulate and implement strategies that will set reasonable standards (Saad 1992, p.65). The company has been grouped as one of the top standard setting bodies in the entire Islamic financial institutions. The organization has also developed an activity that will help it greatly to set its standards. This activity will involve a broad review on how well the industry addresses and operates issues such as how the scholars’ boards work. Another standard setting activity that AAOIFI is formulating pronouncements. These pronouncements develop its intentions towards offering services to entire Islamic financial firm in their respective countries of operation (Schoon 2009, p.76).  To date AAOIFI has managed to issue two financial accounting statements that are related to the concepts and objectives of financial accounting of the Islamic financial firms. Ten standards of accounting, an accountants’ code of ethics, as well as five auditing standards of Islamic financial firms, have also been issued. This makes a total of eighteen pronouncements. Three more new standards are also being worked on. This is an impressive indicator of how the organization is committed its standard setting activities of its members (Syed 2007, p.56).  Another activity by which the organization has formulated towards setting standards is the formation of a process that is used in governance of the production the auditing and accounting standards. This process incorporates the vetting process of juristic suitability of all the standards that have been proposed by the AAOIFI’s committee. The interested parties are also offered with a room to air their opinions concerning the opinions that the board has received before their approval. The interested parties usually hold the public hearings. This activity is very essential to the members of the organization since it helps them to obtain standards that are well reviewed. It also acts as an advantage to AAOIFI since it is capable of receiving and discharging standards to its members that are of quality (Visser 2009, p. 45).  AAOIFI also carries out an activity of recruiting and selecting Members of the accounting committee. These members are responsible for the drafting of the standards in the organization. There are benefits that are derived from these discussions that occurred in the public hearing. The AAOIFI will be able to in the formulation of the standards that will be of benefit. They will be utilized in the development of the capital markets of the Islam’s. The AAOIFI is also aiming in the production of high quality products that will update them and help them to achieve the standards of those who use the financial institutions. However, the efforts made can only bear fruit if the standards are p to use (El-gamal 2006, p.47).  The IFSB stands for the Islamic financial services board. It is an international body that is charged with the mandate of setting standards. These standards should be able to promote the viability and also the stability of the financial services of the Islam’s. This is achieved by the formulation of the global and also the guiding principles of the companies. They are related with the fields of capital markets, the insurance sect and also the banking industry. This body is also responsible for conducting research and also the coordinating of the initiatives in the mentioned fields. This organization can also do the organization of seminars, round tables and also conferences for the stakeholders of the industry (Al-omar & Abdel-haq 1996, p.44).  The IFSB body is highly concerned with the gaining of prominence in this industry. This is as a result of the industry taking a higher level in the banking sector of the individual countries of the Muslims. The guidance that was realized by this group was based on the standard 2. These were the situations that were faced in the next several years. The Takaful firms gave the problems that were faced by the Muslims who were insurers. There was also the fact that their products were not compliant with to the sharia principles. Their funds were described by the best practices and disclosed the information (Ariff & Iqbal 2011, p.26).  There are difficulties that are encountered with these financial institutions. These institutions have abided to the perception of the Shariah. This is a challenge because Shariah prohibits the payment of the interest for the transactions in business. There is also the possibility of opening of other dynamic challenges as the accounting and also reporting are done by the Islamic financial bodies (Venardos 2010, p.32). This is because the professionals who are only conversant with the western theories may have difficulties facing the accounting academics in the muslim world. The shareholders of these banks also expect the bank auditors to be Muslims and to deliver a more comprehensive report. This is because they are aware of the (Shariah 2002, p.42).  Another challenge that is experienced is that the accounting policies that are taken by the banks in the Islam region with regards to the preparation of the financial policies are unregulated. Because of this reason individual banks have moved on to develop their own policies. Such task is based on the deliberations that are made by the bank and the external auditor. This method focuses on whether the standards of the host country are in line with the Shari‘ah. The development of personal accounting policies may result to a variety of practices in the Islamic institutions (ʻUs̲mānī 2002, p.56). There is also the challenge that some financial bodies make the use of many methods of Murabaha profits in one financial period. Another challenge is the methods used by the financial institutions allocate the profits between the account holders and the investors. There is the disclosure of information in their operations. These variations are caused because there is no match between the Shariah and the accounting standards of the international community. These variations also emerge due to the different interpretations of the Shariah that may happen (Haddad & Stowasser 2004, p.56).  References list Archer, S., & Karim, R. A. A. (2007). Islamic finance: the regulatory challenge. Singapore [u.a.], Wiley. Pp.7 Ayub, M. (2007). Understanding Islamic finance. Hoboken, NJ, John Wiley & Sons. Pp 21-26 Al-omar, F., & Abdel-haq, M. (1996). Islamic banking: theory, practice & challenges. Karachi [u.a.], Oxford Univ. Press [u.a.].Pp. 43-44 Ariff, M., & Iqbal, M. (2011). The Foundations of Islamic Banking Theory, Practice and Education. Cheltenham, Edward Elgar Pub. Pp.24-26  Coulson, N. J. (1978). A history of Islamic law. Edinburgh, Edinburgh University Press. Pp.34 El-gamal, M. A. (2006). Islamic finance law, economics, and practice. Cambridge [UK], Cambridge University Press. Pp.45-47 Eisen, P. J. (2007). Accounting. Hauppauge, N.Y., Barrons Educational Series. Pp.64 Haddad, Y. Y., & Stowasser, B. F. (2004). Islamic law and the challenges of modernity. Walnut Creek, CA, AltaMira Press. Pp.56 Hanif, M. (2012). Islamic banking: financial reporting perspective. Lexington, KY, [Createspace]. Pp.88).  Nasir, J. J. (2009). The status of women under Islamic law and modern Islamic legislation. Leiden, Brill. Pp.34 Naʻīm, ʻ. A. A. (2002). Islamic family law in a changing world: a global resource book. London [u.a.], Zed Books. Pp.45 Saad Abdul Sattar Al-harran. (1992). Islamic banking: managing the challenges. Kuala Lumpur, Malaysia, Institut Kajian Dasar (IKD) Malaysia. Pp. 65 Schoon, N. (2009). Islamic banking and finance. London, Spiramus Press. Pp.76 Syed Alwi Mohamed Sultan. (2007). A mini guide to Shariah audit for Islamic financial institutions: a primer. Malaysia, Cert Publications. Pp.56 ʻUs̲mānī, M. T. (2002). An introduction to Islamic finance. The Hague [u.a.], Kluwer Law Internat. Pp.56 Venardos, A. M. (2010). Current issues in Islamic banking and finance resilience and stability in the present system. Singapore, World Scientific. Pp.32 Visser, H. (2009). Islamic finance: principles and practice. Cheltenham, U.K., Edward Elgar. Pp. 45 Read More