The Impact of the Islamic Religion on the Harmonisation of International Accounting Standards
The Impact of the Islamic Religion on the Harmonisation of International Accounting Standards
Justin Lingard – S200990
October 2010
Table of Contents Introduction 4 User requirements of financial reports 5 IFRS Compliance Issues with Shari ‘a law 6 Riba 6 Gharar 7 Zakat 7 Conclusion 8 References 10
Introduction
Islam is the world’s second largest religion with over 1.65 billion followers, which constitutes 24% of the world’s population (Kettani, 2010). Islam is a religion that encompasses all aspects of a Muslim’s life, from issues of an ethical, social and civil nature to economic and legal matters. In this way it is quite different to the secular view normally held in the West, which separates business decisions from religious consideration.
The rules that govern Islam are called Shari’a law. Shari’a law comprises of two main writings, the Qur’an and the Sunnah. The primary source is the Qur’an and it is believed to be the words of god as revealed to the Prophet Muhammad (peace be upon him (PBUH)). The second source is the Sunnah which contains God inspired acts, sayings of the prophet (PBUH) and acts of the prophet’s (PBUH) companions to which he was uncritical. In addition to these two sources, the Ijma are pronouncements representing the consensus of Islamic scholars on matters not covered in the Qur’an or Sunnah (Hamid et al, 1993). The Ijma are interpretations which are obviously subjective, and as such several different forms of Islam have emerged, each based upon different interpretations.
Islamic Financial Institutions (IFIs) have arisen due to Muslims’ need for Shari’a compliant banking. Due to the different nature and activities of these IFIs, specialised standards are required. The not for profit Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in 1991 to create such specialised standards. AAOIFI will use International Financial Reporting Standards (IFRS) where there is no
Justin Lingard – S200990
October 2010
Table of Contents Introduction 4 User requirements of financial reports 5 IFRS Compliance Issues with Shari ‘a law 6 Riba 6 Gharar 7 Zakat 7 Conclusion 8 References 10
Introduction
Islam is the world’s second largest religion with over 1.65 billion followers, which constitutes 24% of the world’s population (Kettani, 2010). Islam is a religion that encompasses all aspects of a Muslim’s life, from issues of an ethical, social and civil nature to economic and legal matters. In this way it is quite different to the secular view normally held in the West, which separates business decisions from religious consideration.
The rules that govern Islam are called Shari’a law. Shari’a law comprises of two main writings, the Qur’an and the Sunnah. The primary source is the Qur’an and it is believed to be the words of god as revealed to the Prophet Muhammad (peace be upon him (PBUH)). The second source is the Sunnah which contains God inspired acts, sayings of the prophet (PBUH) and acts of the prophet’s (PBUH) companions to which he was uncritical. In addition to these two sources, the Ijma are pronouncements representing the consensus of Islamic scholars on matters not covered in the Qur’an or Sunnah (Hamid et al, 1993). The Ijma are interpretations which are obviously subjective, and as such several different forms of Islam have emerged, each based upon different interpretations.
Islamic Financial Institutions (IFIs) have arisen due to Muslims’ need for Shari’a compliant banking. Due to the different nature and activities of these IFIs, specialised standards are required. The not for profit Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established in 1991 to create such specialised standards. AAOIFI will use International Financial Reporting Standards (IFRS) where there is no
References: Ibrahim, M and Hameed, S 2007 “IFRS vs AAOIFI; The Clash of Standards?” Munich Personal RePEc Archive, Paper No. 12539, viewed 28 August 2010, http://mpra.ub.uni-muenchen.de/12539/.