Question

I need an answer for this question : ( the subject is Islamic accounting )

Accounting is Islam is dichotomous to the western perspective. Accountability of the muhaseeb (accountant ) is important as Muslim is bound by the duties and responsibilities outlined by the shariah Islamia. Discuss the differences between Islamic and conventional accounting, and the concept of accounting and accountability in Islam and by referring to the Surah Al Baqarah, verse 282 and thesis from Yaacob and Nahar (2011) to support your argument.

Answer 1

The following depicts a brief sketch highlighting the fundamental functional differences. However, with the progress of research; further analysis will be made focusing on accounting treatment of specific transactions to understand how the differences between conventional and Islamic accounting have implications in the recording, processing and reporting financial transactions under these two different systems. A. Disclosure Social accountability and full disclosures are the basis of Islamic corporate reports. The tenets of Islamic accounting differ significantly to the conventional accounting system which sought to provide useful information primarily to investors and creditors. Whereas, the concept of disclosure in Islamic accounting is for entities to disclose all such information that would be necessary to inform the entire community about their operations, irrespective of whether this information is favourable or not for the entity. Islamic corporate financial statements require transparency and avoidance of manipulation which is manifested by full disclosure. B. Financial Statements Islamic corporate reports should comprise of three financial statements: (i) an historic cost statement of financial position, (ii) a current value statement of financial position, and (iii) a Value Added Statement. A social responsibility report and employee reports have also been suggested by Islamic Accounting researchers, as they are congruent with Islamic principles and its commitment to society and to employees. The historical cost balance sheet is supplemented with a current value statement of financial position in order for the calculation of Islamic charity (Zakat). Zakat is obligatory for all Muslim-owned entities and is the cornerstone of Islamic economy, finance and accounting. Zakat is considered to be an important tool of carrying out entities social corporate responsibility that aims at narrowing the gap of income inequality in society. Value Added Statement (VAS) is preferred from the Islamic perspective as it is more aligned with the social well-being objective of Islamic accounting. VAS could provide information on total value added by an enterprise to society and it depicts the wealth distribution between the different sectors of society. From a critical perspective, conventional accounting leads to the unequal distribution of income and wealth with its profit maximisation and cost minimisation objective, and treatment of the dividend as part of the profit and wages as expense. Whereas, VAS can change the focus, by calculating the total value added to society by an enterprise and then showing its distribution to employees, shareholders, creditors, and the enterprise, as well as to society through Zakat. Whether VAS can provide a significant difference from a comprehensive income statement is questionable, as it is basically a rearrangement of the conventional income statement. C.Measurement Islamic Accounting requires current cost as the measurement basis rather than historical cost. The main reason behind it is the Zakat calculation, which is based on the selling price of assets. Current cost measurement is also preferred to ensure more accurate measurement of profit loss share, particularly in the Mudaraba contract. Gambling and Karim proposed Current Cash Equivalent (CCE) as more appropriate valuation method. The Accounting and Auditing Standards for Islamic Financial Institution (AAOIFI), recognises the current value concept; however, due to the lack of adequate means, historical cost accounting still remains the basis of measurement in most of the cases. Mirza and Baydoun advocated using historical cost for all except for Zakat calculation for its reliability characteristic and stewardship function. D.Substance over Form Conventional accounting, particularly International Financial Reporting Standards (IFRS), emphasises on the concept of ‘substance over form’ that implies a transaction will be measured and reported on the basis of its economic substance, rather than legal form. Islamic Accounting is strictly based on Shariah law and therefore on legal form. E. Time Value of Money Another key aspect of conventional accounting is the time value of money. The capitalist economy is heavily based on the interest rate as the money value changes over the period. In Islamic accounting, interest is prohibited and it is viewed as a tool of the capital owner to oppress the borrower. However, Ahmad and Hassan argued that Islamic accounting recognises the time value of money to the extent of pricing in a credit sale which is backed by an asset, e.g. the Murabaha contract. F. Lease Accounting In conventional accounting, International Accounting Standards - IAS17 distinguishes between finance lease and operating lease. In Islamic accounting there is no such distinction, rather all leases are treated like the operating lease of conventional accounting. However, the most common lease in Islamic finance is called Ijarah, by which, one party (lessee) pays another party (lessor), not only to get the right to use an asset but also to acquire the asset at the end of lease term, which is classified as a finance lease in conventional accounting. IAS17 requires the finance lease to be recorded by the lessor as a loan which earns interest, while the lessee records it as the owner of the asset.