Islamic accounting

Question – 01

What distinguishes Islamic accounting and conventional accounting? Briefly discuss the extra aims of Islamic accounting.

Answer – 01

It could be stated that both Islamic accounting every bit good as conventional accounting are both in the concern of supplying information to stop clients. The chief differences lie in the undermentioned factors:

Aim of supplying information

Islamic accounting enables users to guarantee that Islamic organisations abide by the rules of the Shari’ah in all of its traffics and enables the appraisal of whether the aims of the organisation are being met.

Type of information

The type of information which Islamic accounting identifies, steps is different. Conventional accounting dressed ores on placing economic events and minutess, while Islamic accounting must place socio-economic and spiritual events and minutess. Islamic accounting is more holistic in its attack as both fiscal and non-financial steps sing the economic, societal, environmental and spiritual events and minutess are measured and reported.

Different statements

Islamic accounting requires wholly different statements wholly from that of conventional accounting. This is to de-emphasise the focal point on net incomes by the income statement provided by conventional accounting.

Users of studies

Islamic accounting recognizes that all including the society are the users of the studies. The ground being that society as a whole can do corporations accountable for their actions and guarantee that they comply with Shari’ah rules and do non harm others while doing money ethically and accomplish a just allotment and distribution of wealth among members of society particularly the stakeholders of the concerned corporation.

The importance of set uping aims

Accounting bookmans and practicians likewise have found that the procedure of developing fiscal accounting criterions without set uping aims leads to inconsistent criterions which may non be suited for the environment in which they are expected to be applied.

Agreement on the aims of fiscal accounting for Muslim Bankss would accomplish many benefits:

  • The aims will be used as a usher by the Financial Accounting Standards Board for Islamic Banks and Financial Institutions when developing fiscal accounting criterions. This should guarantee consistence in developing criterions.
  • The aims will help Islamic Bankss, in the absence of recognized accounting criterions, in doing picks among alternate accounting interventions.
  • The aims will be available as a usher and a regulator of subjective judgement made by direction when fixing the fiscal statements and other fiscal studies.
  • The aims, when decently defined, should increase users ‘ assurance and apprehension of accounting information and, in bend, their assurance in Islamic Bankss.
  • Establishing aims should take to the development of accounting criterions which are likely to be consistent with each other. This should increase users ‘ assurance in the fiscal studies of Muslim Bankss.

Fiscal accounting is chiefly concerned with supplying information to help users in doing determinations. Those who deal with Islamic Bankss are concerned, in the first topographic point, with obeying and fulfilling Allah in their fiscal and other traffics. It is natural, hence, that there should be differences between aims established for other Bankss and those to be established for Islamic Bankss. Those differences stem chiefly from differences in the aims of those who need accounting information and, hence, in the information they need. This does non intend, nevertheless, that we should reject all the consequences of modern-day accounting thought in non-Islamic states. This is so because there are common aims between Muslim and non-Muslim users of accounting information.

In add-on to the above, there are other grounds why different aims of fiscal accounting should be established for Islamic Bankss. Those are:

  • Muslim Bankss must follow with the rules and regulations of Shari’ah in all their fiscal and other traffics.
  • The maps of Muslim Bankss are significantly different from those of traditional Bankss who have adopted the Western theoretical account of banking.
  • The relationship between Islamic Bankss and the parties that deal with them differs from the relationship of those who deal with traditional Bankss.

Two attacks to set uping aims have emerged through the treatment which took topographic point at different meetings of the commissions established by the Board. These are:

  • Establish aims based on the rules of Islam and its instructions and so see these established aims in relation to modern-day accounting idea.
  • Start with aims established in modern-day accounting idea, prove them against Islamic Shari’ah, accept those that are consistent with Shari’ah and reject those that are non.

In order to prove each attack and choose an appropriate one, assorted attempts were put in by assorted Shari’ah bookmans. Subsequent to all their attempts it was decided that the 2nd attack be chosen to set up aims of fiscal accounting for Islamic Bankss and fiscal establishments.

The chief classs of users of external fiscal studies for Muslim Bankss whose information demands are addressed in this statement include:

  1. Current and salvaging history holders.
  2. Equity holders.
  3. Holders of investing histories.
  4. Other depositors.
  5. Others who transact concern with the Islamic bank, who are non equity or history holders.
  6. Regulatory bureaus.
  7. Zakah bureaus.

It is possible to sum up the common information demands of users as follows:

  1. Information which can help in measuring the bank ‘s conformity with the rules of Shari’ah in all of its fiscal and other traffics.
  2. Information which can help in measuring the bank ‘s ability in:
  1. Using the economic resources available to it in a mode that safeguards these resources while increasing their value, at sensible rates.
  2. Transporting out its societal duties and in peculiar those that have been specified by Islam, including the good usage of available resources, the protection of the rights of others and the bar of corruptness on Earth.
  3. Supplying for the economic demands of those who deal with the bank.
  4. Keeping liquidness at appropriate degrees.
  1. Information which can help those employed by the bank in measuring their relationship and hereafter with the Islamic bank, including the bank ‘s ability to safeguard and develop their rights and develop their managerial and productive accomplishments and capablenesss.
  2. It is assumed that the types of information described above represent the lower limit required to fulfill the common information demands of external users of fiscal studies.

In decision, the followers could be stated as the aims of Islamic accounting:

  1. To find the rights and duties of all interested parties, including those rights and duties ensuing from uncomplete minutess and other events, in conformity with the rules of Islamic Shari’ah and its constructs of equity, charity and conformity with Islamic concern values.
  2. To lend to the safeguarding of the Islamic bank ‘s assets, its rights and the rights of others in an equal mode.
  3. To lend to the sweetening of the managerial and productive capablenesss of the Islamic bank and promote conformity with its established ends and policies and, above all, conformity with Islamic Shari’ah in all minutess and events.
  4. To supply, through fiscal studies, utile information to users of these studies, to enable them to do legitimate determinations in their traffics with Muslim Bankss.

Question – 02

Discuss the Shari’ah audit issues and their importance in relation to fiscal statements of Muslim Bankss.

Answer – 02

There are assorted issues in a Shari’ah audit that could confront an Islamic fiscal establishment. The undermentioned treatment pertains to those issues and their high relevancy to the fiscal statements of such establishments.

First and first, any Islamic bank that is found to hold breached any of their fiducial responsibilities or have contravened the compacts of Shari’ah could be in a serious and potentially harmful state of affairs by judicial proceeding from its investors and other 3rd parties. Hence, to do certain Islamic Bankss comply decently with the demands of Shari’ah rules every bit good as their public presentation of fiducial responsibilities and duties, there should be really close cooperation between the Shari’ah Boards and the external hearers. This procedure will assist to guarantee conformity in all these respects.

The term or instead the construct now normally known as “ Shari’ah audit ” is now understood that the ensuring of Shari’ah conformity, fiducial conformity and farther the assignment of the formal duty to guarantee all such conformities are in order. The Shari’ah audit of an Islamic fiscal establishment is non needfully limited to the public presentation by an external hearer. It could be performed by the Islamic fiscal establishment ‘s really ain Shari’ah Board or by external hearers every bit good. If the Shari’ah audit is being done by the Shari’ah Board, they should be capable of making the undertaking.

On one position, it should clearly be noted that when the Shari’ah audit is performed by the bank ‘s external hearers they will doubtless guarantee equal independency to be maintained. Further, these hearers would most decidedly require cognition, competency and expertness to get by with Shari’ah conformity issues and fiducial conformity issues.

On another position, if the Shari’ah audit is being carried out by the Shari’ah Board of the Islamic bank, they will hold to guarantee sufficiently or maximal independency in order to transport out a thorough and an effectual audit. Like in the old state of affairs, the Shari’ah Board will hold to hold cognition, competency and expertness to get by with and work out issues associating to accounting issues and their deductions.

Some modern-day Islamic fiscal establishments have now a group of bookmans known as “ Shari’ah internal hearers ” . These persons are besides members of the establishments Shari’ah Board. They on a uninterrupted footing proctor Shari’ah and fiducial conformity and study findings to the chief Shari’ah Board.

Therefore, based on the above two scenarios the Shari’ah Board as good the external hearers will necessitate close interceding with each other on a uninterrupted footing to guarantee that all possible Shari’ah and fiducial conformity issues, which the Islamic bank may be exposed to, are addressed and resolved on a timely and accurate footing.

Finally, in order to guarantee that all Islamic Bankss comply with all the compacts of the Shari’ah and execute their fiducial responsibilities and duties every bit good towards their depositors, it is extremely of import that there are proper regulations and ordinances established. These are of import with respect to general and extra revelation demands in the Islamic Bankss fiscal statements, such as revelation demands of the:

  • Accounting policies
  • Disposal of non-Shari’ah conformity net incomes
  • Net income distribution policy
  • Shari’ah advisers
  • Zakat duties

Hearers are responsible for organizing and showing sentiments on fiscal statements. It is besides their duty for fixing and showing fiscal statements in conformity with all Shari’ah regulations and rules. The relevant statute law and ordinances is that of the direction of the fiscal establishment.

Therefore, it should clearly be understood that the audit of the fiscal statements does non alleviate the direction of the fiscal establishment of this duty. Thereby, bespeaking the importance of Shari’ah audit issues and their importance to the readying of fiscal statements of Muslim Bankss.

Question – 03

Why is revenue enhancement an of import issue for Islamic banking merchandises?

Answer – 03

A common misperception created in the heads of most people presents is the perceptual experience of unjust revenue enhancement. Muslim Bankss, other than in Malaysia have developed in a comparatively revenue enhancement free surroundings. Even states such as Pakistan, general commissariats were made to relieve from revenue enhancement for Islamic finance arranged on a cross boundary line footing, but no specific commissariats were made for within the state. It was the UK authorities that took a lead in the West in revising its revenue enhancement jurisprudence to include specific commissariats for Islamic merchandises and services.

The followers is a treatment about a cardinal revenue enhancement issue that arose in UK and how it was resolved. In fact had this issue non been decently resolved it would hold derailed any programs to set up Islamic Bankss in the UK. The cardinal issue relates to the revenue enhancement intervention of Islamic sedimentation histories that in theory paid a net income portion to the depositor. Deposit histories offered by the Islamic Bank of Britain were based on the rule of Mudharabah.

By and large, any involvement payments made by Bankss to its depositors is deductible from gross income before revenue enhancement is calculated. However, in conformity with anti-avoidance regulations in UK, any “ involvement ” payments made on sedimentations that were linked to the net income made by a bank was non allowed to be deducted from gross income but was considered as distribution of net income after revenue enhancement. In other words, these were considered as dividend payments.

Example: Suppose a bank paid & A ; lb ; 100 on normal sedimentation histories. This sum was deducted from its gross income, say & amp ; lb ; 300. Hence, revenue enhancement paid on the net sum of & A ; lb ; 200. If on the other manus, the & A ; lb ; 100 payment was linked to gain made by the bank, revenue enhancement would be deducted on the gross income of & A ; lb ; 300 and the & A ; lb ; 100 was considered as distribution after revenue enhancement. This of class consequences in much higher revenue enhancement charge for the bank. The net income payment on the Islamic sedimentation histories was at first considered to be linked to the net income made by the Islamic Bank of Britain and hence was non allowed to be deducted as an disbursal against gross income. This high incidence of revenue enhancement charge made the Bank economically unviable.

To get the better of the above issue, the UK authorities established a particular Inland Revenue undertaking force to reexamine the revenue enhancement of Islamic merchandises so as to guarantee that there was a “ flat playing field ” with the conventional market.

In the authorities paper, “ Regulatory Impact Assessment for Shari’ah Compliant Products ” that accompanied the Budget for 2005 it was stated that the key policy aim for revenue enhancement of Shari’ah compliant merchandises is to guarantee that such merchandises are:

“ ..taxed in a manner that is neither more nor less advantageous than tantamount banking merchandises. The intended consequence of the proposals is to let suppliers to offer Shari’ah compliant merchandises without confronting commercial disadvantage and to enable clients to take up these merchandises without meeting uncertainness or disadvantage over revenue enhancement intervention ” .

The solution that emerged from the undertaking force and included in the Finance Act 2005 was to specify Islamic merchandises as “ Alternate Fiscal Arrangements ” and to put out the cardinal constructions of the agreements in the statute law. The net income payment on the sedimentations was termed as “ Profit Share Return ” . Islamic merchandises are non specially mentioned in the Finance Act but merely in the explanatory notes. Furthermore, the Act is concerned non with rules but the specific constructions of the merchandises. This was done to extenuate the hazard of these constructions being used to avoid revenue enhancement. In the explanatory notes it was clearly stated that the relevant legislative clauses relate to agreements:

“ that involves net incomes and losingss on gross revenues of assets or net income portion understandings that are economically tantamount to conventional banking merchandises, but are non involvement or bad returns. The step ensures that such agreements are taxed no more or less favorably than tantamount finance agreements affecting involvement ” .

In other words, net income payments made for Islamic sedimentations that conformed to those agreements were “ deemed ” to be involvement and therefore treated for revenue enhancement intents as any involvement payments. This ensured that Islamic sedimentations were taxed on the same footing as conventional sedimentations. In our above illustration, Islamic Bankss paid revenue enhancement on the net & A ; lb ; 200 instead than the gross sum.

For interest of lucidity, in instance of Islamic sedimentation the Finance Act defines the undermentioned agreements that give rise to gain portion return:

  1. The depositor deposits money with a fiscal establishment.
  2. The money, together with money deposited with the establishment by other individuals, is used by the establishment with a position to bring forthing a net income.
  3. From clip to clip the establishment makes or credits a payment to the depositor, in proportion to the sum deposited by him, out of any net income resulting from the usage of the money.
  4. The payments made or credited by the establishment equate, in substance, to the return on an investing of money at involvement.

Other than ( vitamin D ) above, the construction described is a Mudharabah. Similarly the Finance Act 2005 besides defined an Islamic finance agreement based on Murabahah rule and termed the tantamount net income sum charged to clients as “ Alternate Finance Return ” .

Prior to 2005, the authorities had already resolved the issue of dual incidence of Stamp Duty on belongings financed utilizing Islamic constructions. Normally whenever belongings is purchased, the purchaser has to pay a Stamp Duty. In instance of Islamic finance where Bankss buy the belongings and so sell to the client, there were two Stamp Duties collectible, foremost by the bank and so by the client. In 2003, the authorities had amended the Stamp Duty regulations to bear down merely one Stamp Duty on such finance agreements.

These regulations were farther refined in the Finance Act 2005. Since 2005, UK authorities has continued to add to the revenue enhancement statute law for Islamic merchandises. Islamic mortgages utilizing Decreasing Musharakah agreements, Islamic bureau histories and late in the Finance Bill 2006, Islamic bonds ( Sukuks ) have been covered.

The other issue associating to revenue enhancement was VAT. This has been more hard to decide since VAT is a European broad statute law and requires any major alteration at the European degree. Despite this, the UK authorities has issued guidelines on the application of VAT to Islamic merchandises. These guidelines have ensured that Islamic merchandises are treated in the same manner as conventional merchandises.

It is of import to stress that the important development outlined above in regard of revenue enhancement of Islamic merchandises could non hold been achieved had there non been committedness from Chancellor and his Treasury curates. Importance has continued to be given to the success of Islamic finance in the UK and concerns that hinder a flat playing field for the Islamic finance market are being carefully reviewed and resolved. The lead taken by UK governments to revenue enhancement Islamic merchandises is now being considered by other governments as possible solution to assist the Islamic markets to boom.


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