A critique on accounting for murabaha contract

2016 ◽  
Vol 7 (3) ◽  
pp. 190-201 ◽  
Author(s):  
Mezbah Uddin Ahmed ◽  
Ruslan Sabirzyanov ◽  
Romzie Rosman
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Economic Consequences ◽  
Islamic Banks ◽  
Content Type ◽  
Time Value Of Money ◽  
Time Value ◽  
Islamic Financial Institutions ◽  
Financial Transactions ◽  
Value Of Money

Purpose The purpose of this paper is to examine the accounting treatment and reporting of a murabaha contract and its implication to the financial statements of Islamic banks. In addition, the paper also explains the implication of time value of money on the measurement of a murabaha contract and the concept of substance over form in recognising financial transactions. Design/methodology/approach This study reviews the accounting treatment and reporting for a murabaha contract as stated in the Financial Accounting Standards (FAS) of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the application of a murabaha contract as a financial instrument based on International Financial Reporting Standards (IFRS). Findings The paper finds that, while IFRS-based financial reporting primarily focuses on economic consequences of financial instruments, AAOIFI further takes into consideration the legal structure of the instruments, which are based on Shari’ah precepts. The paper also finds that IFRS-based financial reporting cannot always capture the distinctive structure of the murabaha and, hence, may lack representational financial reporting. However, the IFRS recognizes the substance of a murabaha contract as financing, and the majority of Islamic banks in Malaysia report it as one of financing and not as a trading contract. For measurement, IFRS adopted the concept of time value of money where the profit allocation is based on amortized cost, which is similar to the measurement of conventional loan transactions that apply the concept of effective interest rate. Meanwhile, AAOIFI uses a straight-line basis to allocate the profit of a murabaha contract. Practical implications The forthright discussion and the observations of the paper are expected to assist regulators and standard setters in developing accounting standards that are in convergence but also cater to the unique characteristics of Islamic financial transactions. Originality/value The paper criticizes both accounting treatment of a murabaha contract based on the AAOIFI and IFRS and then suggests an extension of these treatments to be adopted to improve the reporting.

scholarly journals Diverse accounting standards on disclosures of Islamic financial transactions

2019 ◽  
Vol 32 (3) ◽  
pp. 866-896 ◽  
Author(s):  
Habib Ahmed ◽  
Faruq Arif Tajul Ariffin ◽  
Yusuf Karbhari ◽  
Zurina Shafii
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Islamic Banks ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Islamic Financial Institutions ◽  
Financial Transactions

Purpose Since International Financial Reporting Standards (IFRS) are not primarily meant for the accounting needs of Islamic banks, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established to develop specific accounting standards for Shari’ah compliance. The purpose of this paper is to assess the de jure harmonisation between the disclosure requirements of the IFRS-based Malaysian Accounting Standards (MAS) and those of the AAOIFI. Design/methodology/approach Using Malaysia as a case study, the paper examines the extent of the de jure congruence between the IFRS-based MAS and AAOIFI’s Financial Accounting Standard No 1 (FAS1), which is considered to be one of the key disclosure standards for Islamic banks. We employ leximetrics and content analysis to analyse these accounting standards and the additional guidelines introduced by the Malaysian Accounting Standards Board (MASB) and the Central Bank of Malaysia (Bank Negara Malaysia, BNM) to identify the gaps between different tiers of MAS and FAS1. Findings The study finds that de jure congruence between the IFRS-based MAS and AAOIFI standards has improved through the introduction of additional accounting guidelines by both the MASB and the banking regulator, BNM. However, some gaps remain between the two standards. These gaps may be difficult to completely eliminate due to differences in the fundamental principles underlying the development of both standards. Originality/value While some studies have explored the de facto congruence between AAOIFI accounting standards and others, this paper is the first, to the best of the authors’ knowledge, to examine the de jure congruence between those standards with the IFRS-based MAS.

Classification of profit-sharing investment accounts

2017 ◽  
Vol 10 (3) ◽  
pp. 351-370 ◽  
Author(s):  
Aprilia Beta Suandi
Keyword(s):  
Financial Reporting ◽  
Sample Selection ◽  
Accounting Standards ◽  
Financial Statements ◽  
Profit Sharing ◽  
Islamic Banks ◽  
Content Type ◽  
Current Accounting ◽  
Islamic Financial Institutions

Purpose The purpose of this paper is to examine the classification of profit-sharing investment accounts (PSIAs) under various accounting standards, and determine whether Islamic banks maintain uniform practices when the same accounting standards are applied. It also aims to determine whether Islamic banks consider investment account holders (IAHs) important financial statement users by disclosing necessary information pertaining to PSIAs. Design/methodology/approach A sample composed of financial statements from 63 Islamic banks from 15 countries is compared with respect to the information related to PSIAs. Findings The results show heterogeneity of classification for PSIAs. Applying the same standards does not lead to the uniform classification of PSIAs when banks apply International Financial Reporting Standards, while financial statements applying Financial Accounting Standards by the Accounting and Auditing Organization for Islamic Financial Institutions are more similar. The perplexity in classifying PSIAs brings obscurity on the treatment for PSIA-related accounts, particularly returns attributable to IAHs. The fact of fewer disclosures pertaining to PSIAs in Islamic banks – which apply accounting standards not specifically tailored to Islamic finance – suggests that IAHs receive less attention under those accounting standards. Research limitations/implications The main limitation relates to the lack of financial statements available online and the possibility of sample selection bias toward larger Islamic banks. Originality/value This research contributes to the limited literature on accounting for PSIAs, and reveals the diversity of reporting methods for unique transactions in Islamic banks and the insufficiency of current accounting standards to guide them, which create possible challenges of comparability.

Prepayment rebate in Islamic microfinance cost-plus sale: a descending rebate proposed approach

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Islam Mohamed Kamal
Keyword(s):  
Design Methodology ◽  
Relevant Literature ◽  
Islamic Finance ◽  
Content Type ◽  
Time Value Of Money ◽  
Time Value ◽  
Early Settlement ◽  
Islamic Financial Institutions ◽  
Value Of Money ◽  
Compliant Approach

Purpose This paper aims to propose an Islamic compliant approach that deals with the prepayment rebate on debts resulting from cost-plus sales and their accompanied sale-based financing contracts. The proposed approach uses the time value of money concept without charging excessive fees from the debtor in the early settlement of debts. Design/methodology/approach The paper uses a qualitative analysis via analyzing and reviewing relevant literature. A quantitative analysis is subsequently used with a proposed computation that addresses prepayment rebate accompanied by debts resulting from cost-plus sales. Findings The proposed approach results in a rebate amount for the debtor greater than those rebate amounts resulting from either conventional finance techniques or current Islamic finance practices. Research limitations/implications The application of the descending rebate proposed computation in this paper is restricted to cost-plus sale and their accompanied sale-based financing contracts only. The computation does not address any agreement or deal that may involve a rebate without a selling transaction. Originality/value The paper criticizes the prevailing practices for computing rebates in the case of debt prepayment, whether those nominated by conventional finance or others currently employed by most Islamic financial institutions. The paper also introduces a new rebate computation aimed to comply with Islamic finance's real context.

Influence of adoption AAOIFI accounting standards on earning management: evidence from Islamic banks

2020 ◽  
Vol 11 (9) ◽  
pp. 1847-1870 ◽  
Author(s):  
Sherif El-Halaby ◽  
Hesham Albarrak ◽  
Rihab Grassa
Keyword(s):  
Accounting Standards ◽  
Economic Consequences ◽  
Earnings Manipulation ◽  
Islamic Banks ◽  
Probit Regression ◽  
Content Type ◽  
Voluntary Standards ◽  
The Status ◽  
Islamic Financial Institutions ◽  
The Impact

Purpose The economic consequence for adopting accounting standards is one of the growing and valuable topics in accounting research. The purpose of this paper is to address the question whether the adoption of Islamic standards that are issued by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFIs) has a positive effect on the level of earnings management (EM) in the Islamic banks (IBs) setting. The authors measure, in general, the impact of AAOIFI for adopter and non-adopter banks. This paper furthermore investigates whether IBs adopting AAOIFI as compulsory or as voluntary adopters, in general, are being less engaged in earnings manipulation. Design/methodology/approach Using empirical data from 143 IBs across 26 different countries from 2014 to 2018, the paper uses a linear regression model and probit regression analysis that group the banks investigated in this paper into adopters and non-adopters. Additional probit regressions were performed to test to what extent the status of AAOIFI adoption (compulsory or voluntary adopters) has an impact of EM. Findings The adoption of AAOIFI generally is associated with a reduction in the EM level. Furthermore, adopter IBs for AAOIFI is least involved in EM as compared to non-adopter IBs. In addition, the findings of this paper indicate that IBs across countries that mandate AAOIFI standards are less engaged in earnings manipulation as compared to other IBs in countries that adopt AAOIFI as voluntary standards. Research limitations/implications The results reported in this paper provide insights to central banks and regulators regarding the prominence of mandates of AAOIFI standards for IBs to enhance the trust level of stakeholders by reducing the unethical behavior (EM). In addition, this paper supports the applicability of AAOIFI standards for IBs rather than the conventional standards such as IFRS or local GAAP. Originality/value To the best of the authors’ knowledge, the findings are unique at two levels. First, the paper provides evidence on the economic consequences of using AAOIFI in the context of IBs which was not explored by previous research. Second, the paper extends the investigation of the impact of AAOIFI adoption for adopters verses non-adopters, as well as for mandatory verses voluntary adoption of AAOIFI.

Sharia accounting standard for sukuk (Islamic bond) accounting in Indonesia

2018 ◽  
Vol 9 (3) ◽  
pp. 434-447 ◽  
Author(s):  
Dodik Siswantoro
Keyword(s):  
Interest Rate ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Islamic Banks ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Islamic Bank ◽  
Before And After ◽  
Suitable Standard

PurposeThis paper aims to analyze the need of Islamic banks for specific Statement of Financial Accounting Standards (SFAS) No. 110 for sukuk accounting in Indonesia. In fact, some Islamic banks have already prepared International Financial Reporting Standards (IFRS), and accordingly, a suitable standard is needed for this case. Design/methodology/approachThe research methodology involved interview with a senior accounting manager of an Islamic bank focusing on relevant topics in sukuk to sharpen the analysis. Equally important, research reviewed and compared financial statements on sukuk accounting among Islamic banks, before and after adoption of sukuk accounting standard. FindingsIFRS require market valuation based on interest rate. As interest rate is unlawful in Islamic teaching, IFRS may not accordingly be suitable. Therefore, SFAS No. 110 was issued by the Indonesian Institute of Accountants (Ikatan Akuntan Indonesia). Considering the fact that this standard did not explicitly adopt the IFRS paradigm, there have been consequent conflicts in Islamic bank management because of preference of global recognition to IFRS. Adopting IFRS would be more compatible with other countries’ general accounting standards. In addition, significant differences are found in sukuk accounting treatments by Islamic banks before and after the standard adoption. Research limitations/implicationsThis research only focuses on such question of why specific accounting standard for sukuk accounting is needed by Islamic banks in Indonesia, while only few Indonesian Islamic banks were initially aware of the issue. Originality/valueThis paper may be the first paper discussing the response to and need for sukuk accounting in Indonesian Islamic banks.

Factors that influenced the adoption of IFRS by Islamic banks in the UAE

2020 ◽  
Vol 33 (1) ◽  
pp. 75-91 ◽  
Author(s):  
Mohammad Haroun Sharairi
Keyword(s):  
Financial Reporting ◽  
Design Methodology ◽  
Accounting Standards ◽  
Adoption Process ◽  
Islamic Banking ◽  
Reporting Standards ◽  
Islamic Banks ◽  
Content Type ◽  
Financial Reporting Standards ◽  
The Relationship

Purpose This paper aims to investigate the factors that influenced the current adoption of the international financial reporting standards (IFRS) by Islamic banks in the UAE. This paper examined the relationship between the theoretical aspects and practical components of the research investigation regarding the factors that influence the adoption of IFRS. This paper will contribute to the existing knowledge and practices in not only Islamic countries but also Western countries in terms of a deeper understanding of the adoption of IFRS by the Islamic banks and how the factors could influence the Islamic banking adoption, process, activities and financial reporting. Design/methodology/approach Several theories of regulation were considered in this paper to explain the existence of Islamic accounting regulations and understand why some of the Islamic accounting prescriptions became formal regulations, while others did not. Data was collected for this purpose by conducting a survey with professionals and managers of four Islamic banks in the UAE. Findings This paper revealed that factors, such as religion, culture and local investors, may have limited influence on the current adoption of accounting standards in the Islamic banks. Furthermore, this paper uncovered a concern among respondents of issues that developed when Islamic banks commenced the adoption of IFRS. This paper also indicated that respondents’ opinion does not reflect a perception that all IFRS are suitable for the application of Shariah transactions. Originality/value This study is unique as no study has yet explored the factors that influenced the adoption of the IFRS by Islamic banks in the UAE.

scholarly journals “Faithful money” as a new monetary concept of the Islamic banking

2016 ◽  
Vol 5 (3) ◽  
pp. 7-10 ◽  
Author(s):  
Nesrin Benhayoun ◽  
James Fogal
Keyword(s):  
Great Recession ◽  
Islamic Finance ◽  
Islamic Banking ◽  
Islamic Banks ◽  
Economic Activities ◽  
Time Value Of Money ◽  
The Great Recession ◽  
Time Value ◽  
Value Of Money ◽  
Significant Milestone

Coinciding with the Great Recession, Islamic banks have grown rapidly and have crossed the significant milestone of increased wider acceptance at a global level. In part this is due to their unique behavior in considering both ethical and economic activities rather than focus of profit only. This presents a departure from the conventional finance systems based on the use of the interest and the time value of money. This has led to propose new pattern named ’Faithful Money’ for valuation of money and for a performing monetary policy according to Islamic finance basics. This paper presents how following Islamic finance principles can offer substantive contributions to the economic and social development of the world by revealing the rational route to the vision of the highest good without the anathema of interests and debts’ dependence and to embrace the goal to advance the needs of humanity as a whole.

scholarly journals MURABAHAH (Prinsip dan Mekanismenya Dalam Perbankan Islam)

2017 ◽  
Vol 15 (1) ◽  
pp. 83-93
Author(s):  
Ismail Hannanong
Keyword(s):  
Islamic Banking ◽  
Islamic Banks ◽  
Time Value Of Money ◽  
Time Value ◽  
Value Of Money

Abstract: This paper will discuss the mechanism of murabahah agreement and application in Islamic banking, and compare murabahah finance with fixed interest to banks in several key areas. Islamic banks have used murabahah agreements in financing activities through merchandise and expanded their network of uses. Murabahah finance and higher credit prices therein clearly indicate that there is a time value in financing based on murabahah, which leads though not directly to the acceptance of the time value of money.

scholarly journals Accounting standards and value relevance of accounting information: a comparative analysis between Islamic, conventional and hybrid banks

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Serge Agbodjo ◽  
Kaouther Toumi ◽  
Khaled Hussainey
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Accounting Information ◽  
Robustness Analysis ◽  
Accounting Standards ◽  
Islamic Banks ◽  
Content Type ◽  
Moderation Effect ◽  
Mandatory Adoption ◽  
Conventional Banks

PurposeThe purpose of this study is to investigate the value relevance of accounting information for Islamic, conventional and hybrid banks. It also investigates the moderation impact of IFRS adoption and AAOIFI mandatory adoption on value relevance of accounting information.Design/methodology/approachUsing value relevance models, The authors run panel data regressions on 47 Islamic banks, 112 conventional banks and 42 hybrid banks (conventional banks with Islamic windows). The study covers listed banks from 14 countries over the period 2010–2018.Findingspaper offers three empirical evidences. First, the authors find that value relevance of accounting information is higher for Islamic banks, compared to conventional banks. Second, the authors find that IFRS framework strengthens the relevance of accounting information in Islamic banks, but the authors did not find the same for hybrid banks. Third, the authors find that the mandatory adoption of AAOIFI accounting standards has a moderation effect on value relevance of accounting information for both Islamic banks and hybrid banks. The robustness analysis shows that there is a significant contribution of compliance with Islamic Finance rules in IBs and HBs, which substantially reduces managers' opportunistic behavior to manage accounting information.Research limitations/implicationsOne limit of this research is the reduced number of sampled listed IBs since the authors deleted countries that do not have both listed Islamic and conventional banks.Practical implicationsThe study is useful for investors that consider the Islamic ethical practices to make their investment decisions as well as for the standards-setting bodies that focus on establishing accounting standards for the Islamic banking industry.Originality/valueThe authors contribute to the value relevance literature by providing novel evidence on the value relevance in fully-fledged Islamic, fully-fledged conventional and hybrid Banks. The authors also provide new evidence on the moderating role of International Financial Reporting Standards (IFRS) and Auditing Organization for Islamic Financial Institutions standard (AAOIFI) for the value relevance of accounting information.

Comparative study between IFRS and AAOIFI disclosure compliance

2017 ◽  
Vol 15 (3) ◽  
pp. 269-292 ◽  
Author(s):  
Hana Ajili ◽  
Abdelfettah Bouri
Keyword(s):  
Financial Institutions ◽  
Financial Reporting ◽  
Design Methodology ◽  
Islamic Banks ◽  
Accounting Disclosure ◽  
Content Type ◽  
Factors Associated ◽  
Financial Reporting Standards ◽  
Disclosure Requirements ◽  
Islamic Financial Institutions

Purpose This study measures and compares the level of compliance with the disclosure requirements provided by the International Financial Reporting Standards (IFRS) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). This study also aims to investigate the factors associated with this compliance in a sample of Islamic banks (IBs) in Gulf Cooperation Council member states. Design/methodology/approach The sample consists of 39 IBs between 2010 and 2014. Among the selected IBs, 23 banks were complying with the AAOIFI standards and 16 banks were complying with the IFRS standards. An unweighted disclosure index was used to measure the level of compliance with IFRS/AAOIFI disclosure requirements. Findings It was found that the level of compliance with IFRS is higher than that of compliance with AAOIFI. In addition, the results reveal that compliance with IFRS/AAOIFI disclosure requirements is higher for larger and older IBs. Finally, it was observed that compliance was more noticeable for IBs having a higher leverage and multinational subsidiaries. Originality value These findings would be of great help to regulators and policymakers to better understand the accounting disclosure practices of IBs.

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