IDSeries VII discusses the differences between IFRS and AAOFI's financial standards

22nd May 2009

INCEIF's Seventh Intellectual Discourse Series (ID Series VII) today discusses on the issues of the applicability of the International Financial Reporting Standards (IFRS) on Islamic financial institutions. It also looks at the efforts by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in developing an alternative set of financial reporting standards to accommodate the needs of the growing Islamic financial services industry.

En Nik Hasyuden

"The Islamic financial industry needs a corresponding alternative set of accounting standards which can at best be harmonised, not standardised due to the different nature and activities of the Islamic banks and financial institutions. These standards already exist, developed by AAOIFI. 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 INCEIF's Department of Finance and Accounting

Dr. Shahul, a qualified accountant, moderated the ID Series VII at Bank Negara Malaysia today.

Key speaker Nik Mohd Hasyudeen Yusoff of the Malaysian Institute of Accountants (MIA) says that the IFRS were developed by the International Accounting Standards Board (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 notes, highlighting 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.

The MIA President stresses that in any occasion, the contracts entered into by the parties should ensure that the principles of Shariah are complied with.

Commending the efforts of AAOIFI, Mr. 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 says 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.

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.

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. It was recently reported that the proponent of the IFRS will be in talks with Islamic finance authorities to modify the existing system to accommodate the Islamic financial services industry.

IASB Board Member Robert Garnett was quoted as saying that there might be differences between the standards issued by the two bodies but they could be resolved through critical judgement.

Mr. Nik Hasyudeen says the Financial Reporting Standards Implementation Committee (FRSIC) model in facilitating IFRS implementation can be replicated in applying IFRS on Islamic finance transactions. FRSIC is a committee formed by the MIA to provide assistance on matters of common interest relating to accounting standards by way of providing implementation guidance.

He concludes that standard-setting bodies such as the MIA, Islamic Financial Services Board, Malaysian Accounting Standards Board as well as education and research institutions such as INCEIF and ISRA could consolidate resources, expertise and knowledge to facilitate further understanding and development of solutions in this area.

Mr. Nik Hasyudeen was joined by two commentators Mr. Mohammad Faiz Azmi, Partner with PricewaterhouseCoopers and Dr. Syed Musa Alhabshi, Principal Consultant with Amanie Business Solutions Sdn Bhd.

ID Series VII is an on-going forum with an objective of encouraging an exchange of ideas among academia and practitioners on the current issues facing the Islamic financial services industry.

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