Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
A History of the Development of Islamic Accounting
Standards: An Investigation of the Influence of
Key Players
Mohammad Sharairi and Jesmin Islam and Harun Harun
This paper explores the history of the Islamic Accounting Standards
(IAS) developed by the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI). We also identify the roles of key players
in the development of the Islamic accounting standards. Data was
collected through document examination and interviews with the key
players involved in the preparation of Islamic Accounting Standards. It is
found that the main player in setting the Islamic Accounting Standards in
the UAE is Dubai International Finance Centre (DIFC). We also find that
there is a serious concern, particularly in the Islamic countries, with
regard to the IFRS dealing with transactions involving interest (Riba).
One implication of this study is that in the era of globalization, accounting
standards setters who come from different ideological and religious
backgrounds should communicate with each other as their reporting
standards and their different backgrounds can have global implications
beyond their jurisdictions.
Field of research: Accounting
1. Introduction
One of the issues that have been explored by prior studies on Islamic-based
accounting is the nature and process of Islamic accounting standards in different
jurisdictions/counties. For example, Kamlaa et al. (2006) focus on the
development of accounting practices and standards for the environment through
engagement with Islamic principles. They illustrated that Islamic principles are
relevant for accounting for the environment. They argued that Islamic principles
are related to accounting contents at the macro and micro societal levels,
whether in external or internal accounting. Kamlaa et al. (2006) also comment
that western transnational corporations have sought to promote their particular
brand of corporate social and environmental responsibility accounting in Arab
countries, with little or no mention of a notion of accounting for the environment
integral to and deeply rooted in Islam. They also believe that from an
appreciation of the Tawheed (Unity of God), Islamic principles and accounting
*
Mohammad Haroun Sharairi, DBA candidate, Faculty of Business, Government & Law.
University of Canberra, Australia. Email: u3062633@uni.canberra.edu.au

Dr. Jesmin Islam, Faculty of Business, Government & Law. University of Canberra, Australia.
Email: Jesmin.Islam@canberra.edu.au
Dr. Harun Harun, Faculty of Business, Government & Law. University of Canberra, Australia.
Email: Harun.Harun@canberra.edu.au
1
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
standards can be used to monitor and act upon changes usually at a macro level
in flora and fauna and ecological phenomena.
Khan (1994) argued that if there is any international accounting standard which is
not approved from Shariah law it would be replaced. Ahmad and Haron (2002)
explored conventional and Islamic banking facilities, respondents‟ understanding
of Islamic banking system, and their personal opinion on various aspects of
Islamic banking products to investigate the perceptions of persons responsible in
financial affairs of publicly listed companies in Malaysia. They also wanted to
provide useful information to both policy makers in the government and also
those who manage Islamic banks in Malaysia In their study they highlighted that
the most important factor perceived by corporate customers in selecting their
banks is the cost of the services and products.
According to Maurer (2002), the demand for accounting standards for Islamic
business enterprises arises due to the need for standardization in the financial
reporting practices of Islamic business organizations, currently mainly Islamic
financial institutions, to meet the needs of users. The author describes Islamic
banking and finance as a worldwide phenomenon created not just within the
Muslim nations of the countries of the Gulf Cooperation Council (GCC), but also
Malaysia, Indonesia, Great Britain and the United States.
There are some researchers who studied Islamic Accounting Standards and
explained the differences between these standards and International Accounting
Standards (IAS). Lewis and Algaoud (2001) argued that the demand for Islamic
accounting standards is a response to the significant growth in Islamic banks
and financial institutions that has occurred in recent years. They illustrated that
the Qur‟an is a source of principles and guidelines, it contains “approximately
500 injunctions of a legal nature, 20 of which are on economics” (Lewis and
Algaoud, 2001, p.21). For instance, „the injunction against Riba is derived
directly from the Qur‟an, where the prohibition is mentioned four times‟ (Lewis
and Algaoud, 2001, p. 29). Also, one of the other most important considerations
for Islamic accounting standards is the requirement enshrined in the Qur‟an
requiring the payment of Zakah (Lewis and Algaoud, 2001, p. xii).
Abul Hassan (2008) discusses that Islamic Banks are trying to adopt Basel-II
but are facing different kinds of impediments such as liquidity risk, complex
mechanism of profit and loss, product standardization, and absence of Shariah
compliant short term instruments for management of assets and liabilities
mismatch. He argued that Islamic banks face a challenge in adopting
international standards, and it may be taken into consideration that some of the
risk models may expose Islamic banks to other risks that are not apparent for
conventional banks.
In another line of research, some studies investigate the relationship between
the AAOIFI and the Shariah review board. Rahman (2003) stated that in a
2
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Muslim society, accounting is expected to be influenced by the way the
economic system is organized and the philosophy underpinning its system. He
added that according to AAOIFI‟s Statement of Financial Accounting, the need
for accounting objectives for Islamic financial institutions stemmed from the role
of financial accounting. Rahman (2003) asserted that the role of financial
accounting is to provide the information which users of the financial statements
of Islamic banks depend on in assessing the bank‟s compliance with the
precepts of Shariah. Karim (2001) suggested that the perspective adopted by
the supervisory authorities to regulate Islamic banking tended to influence the
accounting treatment of investment accounts adopted by Islamic banks,
although most of the countries in which these banks operate either look directly
to IASs as their national standards or develop national standards based
primarily on IASs. Karim (2001) also casts light on the need to implement the
accounting standards promulgated by the (AAOIFI). According to Karim (2001:
173) “AAOIFI‟s pronouncements are intended to serve Islamic banks in the
various countries in which they operate” (p. 174)
Some researchers have commented that indicated that moving towards the
International harmonization of accounting standards has coincided with the
development of Islamic financial institutions and accompanying accounting
standards Vinnicombe and Park (2007). Islamic accounting standards will
necessarily reflect an underlying theoretical framework based on Shariah law,
whether or not this is deliberately developed. Vinnicombe and Park (2007) said
that
„The pragmatic approach of the AAOIFI is predicated on its
efficiency in that work already undertaken by Western and
other accounting bodies can be utilized, thereby minimizing
both the time and costs associated with the development of
Shariah compliant accounting standards‟ (p.8).
In their study Vinnicombe and Park (2007) examined liabilities and contingent
liabilities. They found that there are clear differences in the requirements for
measurement, recognition and presentation between the AAOIFI and the IASB,
and noted that there may be some practical difficulties arising from different
underlying beliefs and requirements compared with conventional Western
arrangements. They added that these differences may result in the process of
adaptation actually leading to quite different standards, in order to achieve
Shariah compliance.
2. Purpose and Theoretical Framework
In the light of the above gap in the literature, this paper is aimed to explore the
development of the Islamic accounting standards issued by AAOIFI in the United
Arab Emirates by answering the following two research questions in this study:
3
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
 What are the factors leading to the development of the Islamic accounting
standards issued by AAOIF?
 Who were the key players who were played important roles in developing the
AAOIFI‟s standards?
An exploration of the above prior literature with regard to the issue of the
development of the Islamic accounting standards is important as published
studies show has yet to identify the key players who were responsible for the
development of the Islamic accounting standards, the potential adoption of
AAOIFI standards in all the Islamic countries and the possible impact of this
adoption on the Islamic institutions. Therefore, the paper will focus on
understanding the roles of key players who were responsible for the development
of the Islamic accounting standards developed by AAIOFI. We will also
investigate the feasibility of the adoption Islamic accounting standards in the UAE
and explore the expected impacts and benefits of this potential adoption.
This paper will contribute to existing knowledge and practices not only in the
Islamic countries but also in the western countries in terms of a deeper
understanding of the Islamic accounting standards. Moreover, this study is also
unique as there was no published studies in this area that have specifically focus
on the roles of key players involved in the development of the Islamic accounting
standards issued by AAOIFI. Finally, we believe that Islamic banks managers
and shareholders will gain an insight into the development of the Islamic
accounting standards and how these could influence the Islamic institutions
process, activities and financial statements of Islamic banks. The following
section discusses the theoretical framework and research methods used in the
study. Then we highlight and the results and discussion of the findings. Lastly,
we end the paper with concluding remarks which focus on the limitations and of
the study and suggestions for future studies.
The development of the Islamic Accounting Standards is most importantly
underpinned by the theoretical requirements of the Shariah Law. Further
theoretical principles which can also be used to explain the development of the
Islamic Accounting Standard are the public interest theory and the stakeholder
theory in accounting.
The Islamic banks are based on the same principles which are used in the
Islamic teachings and Islamic business principles and these Islamic banks are
covered by the laws of Shariah, also known as the Shariah laws (Van de Ven, &
Ferry, 1980). The main reason to adopt Islamic Accounting Standards for the
Islamic banks is because of the principle that the Islamic banking will have to
follow strict Islamic Shariah rules. The Islamic banks are not a new concept and
these Islamic banks are now widely spread all over the world especially in the
Islamic countries. There are more than 150 banking institutions and banks and
these Islamic banking institutions work all around the world and these are not
limited to the Islamic countries or the Muslim countries. In the year 1993 it was
4
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
estimated that the total assets which are under the control of these Islamic banks
is around US $ 60 billion and this figure will increase up to US $ 100 billion. One
of these principles is to avoid dealing with interest transaction in all form of
business transactions. The main features of the applicability of Shariah principles
which are followed by the Islamic banks are as follow (Tricker, 1976): Category of
principles

Number of principles
 Country specific principles.
2.1 Category of Shariah principles:
The principles of Shariah used by the Islamic banks can be categorized in four
areas: Profit and loss sharing, Fees based system, Free services, and Ancillary
principles. There are 14 principles within the category of these four principles
which are applied by the Islamic banks in their day to day operations. The IBB
Bank of Bahrain and DIB bank of United Arab Emirates have the least number of
principles of the Shariah. These principles are universally used by all the Islamic
banks no matter in whatever country they have their operations (Tricker, 1976).
Further the principles in this part are divided in to three elements which are as
follow:
 The fees which are based on the mark up.
 The fees which are based on commission, and
 The fees which are based on the service provided by the banks.
2.2 Country specific principles - Shariah rules and UAE laws
The rules and laws of Shariah and UAE are made to help and support the
finance of Islamic banks and other financial institutions. The articles 1, 2 and 3 of
Federal Civil Code states that in the first and foremost case the governing law
must apply, and if this law fails then the banks should seek the principles of
Shariah. This code also recognizes many Islamic Shariah, for example – Ijara,
Wakala, Salam, and many more. It also provides guidance on legal issues such
as betting, gambling etc. These laws are supportive to Shariah law. This is so
because these laws are mainly based on the Shariah principles.
2.3 Other theoretical perspectives
Other theoretical perspectives which are applicable to the development of Islamic
Accounting standards are the public interest theory in accounting standard
setting. According to the public interest theory, regulation is initially put in for the
benefit of the public in the society and is not formulated for the vested interest of
the regulators (Hui et al, 2013) In an Islamic society then Islamic accounting
5
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
standards are put in place for the benefit of the followers of Islam in the society
who are the majority of the public in that society.
3. Research Methods
We used two methods for data collection. Firstly, we interviewed a number of
managers in Dubai Islamic Bank, Al Hilal Islamic Bank, members of the Fatwa
and Shariah Supervisory Board of Abu Dhabi Islamic Bank, member of the Fatwa
and Shariah Supervisory Board of Dubai Islamic bank, and members of the
board of trustees of AAOIFI. Following were the main questions used in the
interviews:
 What were the reasons behind the introduction of Islamic Accounting
Standards in the UAE?
 When and where were the first efforts made towards coming up with
Islamic accounting standards in the UAE?
 What were the problems faced and how were the problems been solved?
 Which key parties were involved in the implementation of Islamic
Accounting Standards in the UAE?
Secondly, we also collected our data from document sources such as research
papers and official documents from relevant organizations.
4. Findings and Discussion
Below we present our findings based on the document analysis which reveals
the factors which led to the development of the IASs (Islamic Accounting
Standards) and the key players involved in that development.
4.1 Factors which led to the development of the IASs
Islamic principles emphasize prohibition of Riba and compliance with Zakah.
These principles are impossible to deal with within the conventional accounting
system and have to be dealt with in an Islamic accounting system. The
development of the Islamic accounting standard is also closely related with the
development of Islamic world both financially and politically. The importance of
the Middle Eastern Countries has increased in the world‟s economical
perspective as the Islamic region‟s contribution to the world population is more
than 25% and there are 10 Muslim countries among 18 Oil producing countries
that provide 40 % of the total oil production. This emergence of Middle East
Asian economies in late 1980s and 90s fueled the need of a separate accounting
standards system for Islamic countries. Though Islam doesn‟t mandate any
particular form of accounting, it does stress on the need of complying with
established Islamic beliefs (Tag El Din 2004). The Islamic principles that
condemn Riba (prohibition of acceptance or payment of interests) and such other
practices were the primary reasons behind the modification of several banking
6
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
and operations rules regarding accounting treatments and disclosure
requirements in IFIs (International financial institutes) like World Bank,
International Monetary Fund etc (Abdullah 2010).
Another factor is the increasing contribution of Islamic countries in the world
trade and hence their emerging strategic positions. There are many big financial
institutions and banks in Islamic region which are involved in international
activities including Amana Mutual Fund Trust, the Islamic Bank of Britain,
American Finance House, MSI financial services etc. Also, the Middle Eastern
countries (MEC) are members of many big international organizations such as
World Bank, WTO and UN etc. These increasing contributions of the MEC in
international financial activities have become a reason for the recognition of the
MEC while developing international accounting standards (Odiabat 2010).
Prior to the adoption and implementation of the International Accounting
Standards (IAS) Islamic banks followed International accounting standards but
their specific requirements were not being met. Two issues particularly were not
dealt with. These were:
a) Fiduciary risk: the Mudaraba contract places liability of the loss on the
Mudarib.
b) Displaced commercial risk: where Islamic banks “smooth” the returns
Investment Account Holders (IAH) by varying the percentage of profit taken as
Mudarib share.
One more noteworthy fact is that from the very beginning, Islamic countries were
suffering from their inability to handle the accounting irregularities, launch proper
risk management practices and protection of investors‟ rights. In order to
safeguard these practices, Islamic countries did feel the need for a new
accounting standards system. Another issue is that in Islam it is assumed that
the primary objective of the accounting should be to help a user make important
investment decision. So accounting is regarded as a religious operation and in
order to perform this action, one must use accounting methods which conform to
religious principles. Thus „Shariah‟ is considered very important for Islamic
accounting systems (Khan 2004).
Also the Islamic accounting standards became need of the hour for Islamic
nations because of non-functionality of IFRSs. IFRSs were designed primarily for
addressing the accounting problems of European and various other western
world countries and secondly, they were oriented more towards the conventional
institutions, conventional product structure and practices and thus were
inadequate in addressing the problems related to typical Islamic financial
transactions (Karim & Topkins 1987). The banking, insurance and capital market
structures of these countries were also quite different from the European and
other developed western world markets. Islamic accounting standards were
necessary for the establishment of a financial structure that could emulate
several economical principles laid out by Shariah and keeping all these things in
mind.
7
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
In light of all the above factors, the need of a separate accounting system was
sensed by the financial experts of Islamic world. As a result, in order to provide
support to such banking authorities, AAOIFI standards were developed.
4.2 Key Players
The development of Islamic accounting standards only became possible due to
the collaborative attitude of many parties involved. Islamic communities, Islamic
financial institutions, AAOIFI were some of the key players involved in the
development of the Islamic Accounting Standards. For that matter, the
contribution of International Accounting Standards Board (IASB), International
Accounting Standards (IAS) and International Financing Reporting Standards
(IFRS) cannot be ignored for if these authorities were not there, there would have
been no reason for the development of Islamic accounting standards (Chua &
Taylor 2008). The Islamic accounting standards came only in existence to mend
the loopholes of these already established accounting standards and customize
them according to the stipulations set by Islamic Shariah Law (Mustafa 2003).
There were also important supporters for the development of Islamic Accounting
Standards; Kingdom of Bahrain was the main authority figure behind the
launching of Islamic accounting standards. Later there was support from
governments and financial experts from countries like Jordon, Lebanon, Syria,
Pakistan, Sudan, Malaysia and Indonesia (Sarea 2012).
4.3 Background of the AAOIFI
AAOIFI (The Accounting and Auditing Organization for Islamic Financial
Institution) was the major player in the development of the IAS. This is an
international autonomous not-for-profit Islamic corporate body that devised
accounting standards for various Islamic central banks and Islamic financial
institutions. This organisation was set up in 1991 for Islamic financial institutions
which were established under an agreement of association. This agreement of
association was signed by the Islamic financial institutions on the 26 th February,
in the year 1990 in Algiers. This agreement of association was registered on the
27th of March 1991, in the state of Bahrain.
The AAOIFI was given the responsibility to prepare standards for IFIs
(International Financial Institutes), through the support of institutional members.
Its membership includes central banks, Islamic financial institutions, and
other participants from the international Islamic banking and finance industry,
worldwide (AAOIFI 2013).
AAOIFI takes into its account the advice and suggestions conveyed to it by it‟s
over 200 institutional members from 45 countries. It then issues guidelines,
principles and standards pertaining to accounting, auditing, and ethics. The
AAOIFI establishes, prepares, and issues accounting standard and their
8
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
exposure drafts according to Shariah law. The AAOIFI has a due process system
and uses the expert knowledge of the industries practitioners (Ahmed,
Abdulqadir, 1994).
The Islamic Accounting Standards issued by AAOIFI are used by Islamic
financial institutions and the Islamic industries, such as banks, etc. To date they
have issued in total 26 standards in the areas of accounting area, and 42
covering all the areas of accounting, auditing, ethics and governance for Islamic
financial institutions.
The function of the AAOIFI is facilitated by the Shariah Board which is composed
of a board of trustees. It constitutes of maximum twenty members and the term of
service of the members of Shariah board is a maximum of four years. There are
four major objectives of AAOIFI. These are as follows:
 The major objective of accounting and auditing organization for Islamic
financial institution is related to development of standards related to
accounting and auditing and make standards thoughts relevant to the
Islamic financial institutions.
 Among other objectives one of the objectives of AAOIFI is to publish
polices of the accounting and auditing which are relevant to the Islamic
financial institution. This process is conducted with the help of training the
required employees who require these standards and polices in their
business like the employees of Islamic financial institutions, reserve banks
etc. Application of these accounting and auditing polices is done via
training, seminars, publications, newsletters, and also this is also
conducted by research and other means.
 The AAOIFI also develops, interprets and promulgates the accounting and
auditing standards for Islamic financial institutions.
 AAOIFI has the right to review and modify the accounting and auditing
standards as per the requirement of Islamic financial institutions.
One of the major aims of AAOIFI is also to boost the confidence of the users of
the financial statement and financial information of Islamic financial institutions. It
also encourages the users of financial statement of Islamic financial institutions
to make investments and invest their money in the Islamic financial institutions
and avail the services which are provided by the Islamic financial institutions.
5.
Findings and Discussion
The first question asked was regarding the reasons behind the introduction of
Islamic Accounting Standards in the UAE. UAE was concerned simply because
UAE is predominantly an Islamic country and like every other Islamic countries,
its people put a high emphasis on religious principles. This is why when it comes
to the Islamic principles of Riba, Zakah, Mudaraba, Musharaka etc., Islamic
9
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
financial institutions feel compelled to discard the accounting principles set by the
IASB and use Islamic principles.
Our interviewees stated that as the whole of the Islamic world was coming into
the prominence with phenomenal economic growth, it became imperative for the
financial experts for this part of the world to come up with a new unified
accounting standards system that would cater for the whole region.
The interviewees said that Islamic authorities all over the world had gradually
started opting for Islamic accounting standards developed by AAOIFI. Being a
vital exponent of the Islamic world, UAE too had to show compatibility with it and
then in 2004, with the introduction of Dubai International Financial Centre (DIFC),
it gave its approval to AAOIFI‟s Islamic accounting standards. They also pointed
out that Islamic accounting standards are based more on Islamic beliefs than on
technicalities of accounting; every Muslim does look for a Shariah followed
transaction. That is why AAOIFI came into the existence with its Shariah abiding
laws that suited well to the nature of financial transactions taking place in the
UAE. Our interviewees stated that with the adaptation of the Shariah law based
accounting principles, UAE‟s several Islamic banks and other prominent financial
institutions will start applying these principles in domestic and international
transactions. Domestic transactions, in particular, would get hugely benefitted by
it as the natives started believing that their transactions are now Islamic.
The second question asked was regarding when and where were the first efforts
made towards coming up with Islamic accounting standards in the UAE. All
interviewees agreed that the primary body which was quite influential and very
instrumental in the implementation of Islamic accounting standards in the UAE
was Dubai International Finance Centre (DIFC). DIFC which is one of the most
important financial hubs of UAE has adopted the accounting principles set by
AAOIFI. DIFC acts as an independent jurisdiction and it has its own courts and
laws that are governed by the Law. The main aim of DIFC is to provide the
businessmen with an opportunity to expand their businesses in and out of the
emerging markets of the region (DIFC 2013). DIFC was the first organization that
followed Islamic Accounting Standards in the UAE.
The third question asked was about the particular problems in the current the
adoption of IFRS. One of the interviewees said that there were serious concerns
presented by the investors in the UAE regarding the application of the IFRS
principles in the Islamic countries. Another interviewee argued that there was
always a problem of compliance with regard to the IFRS. Islamic accounting
principles not only abide by the Shariah but also take into account all the positive
aspects of conventional accounting principles of IASB and IFRS. In this way, they
not only take care of the domestic transactions but also of international
transactions that demand compatibility with IASs and IFRSs. So, he suggested
developing some of IASs to comply with Shariah instead of issuing Islamic
Accounting Standards.
10
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Other interviewees said that since the UAE is always perceived as one of the
most important financial hubs in the region, the problem of which accounting
system to choose from became more pertinent and difficult for the users in the
UAE. As recently it became clear that UAE not being a member of International
Federation of Accountants (IFAC) did not commit to the international pressure
and discarded the IFRS principles. Later, it opted for the Islamic accounting
standards.
The fourth question asked was that how have the problems been solved. One
interviewee said that AAOIFI addressed most of the problems of Islamic
countries regarding following IFRS principles, including UAE; by laying out a
policy framework that tried to include Islamic principles in its standards. Another
interviewee said that the accounting standards and principles set up by AAOIFI
solved most of the problems of UAE‟s several Islamic banks and other financial
institutions. These accounting principles laid out by AAOIFI were very
transparent and easy to follow. Simultaneously, these accounting principles were
in accordance with the holy teachings of Quran, thus it won the trust and
confidence of investors and native citizens of the UAE.
The opinion of another interviewee was that he financial experts of the country
were in two minds whether they should stick to the IASB norms (as they were
doing for quite a while) or go for a completely unique accounting standards
system. Many countries of the Middle-East countries had already started
complying with the Islamic accounting standards, and this new system was
gradually getting approval from all over the world, in particular, surprisingly in the
western countries too. Another interviewee said that AAOIFI will not solve the
problem. Keep adopting IAS and develop some of IASs to comply with Shariah.
The fifth question asked was about the key parties were involved in the
implementation of Islamic Accounting Standards in the UAE. The interviewees
agreed that the DIFC was one of the foremost and earliest embracers of
AAOIFI‟s accounting standards and played a vital role in establishing UAE‟s
connection with the AAOIFI‟s norms. The DIFC is one of the most influential
financial institutions in the UAE which connects both the eastern and western
part of the region and is a driving force for economic development of the region.
The UAE‟s emergence as one of the most business-friendly global destinations in
the world owes a lot of credit to the DIFC.
One interviewee added that the Dubai Financial Services Authority (DFSA)
complies itself with the most stringent and transparent accounting principles and
embraces both IASB and Islamic accounting standards system. One of the main
reasons behind the tremendous success of the DIFC as an independent
corporate entity is that the DIFC has its own financial risk-regulator. This
regulator is known as the Dubai Financial Services Authority or (DFSA) as it is
more popularly known. The DFSA issues licenses and supervises the financial
services conducted by the DIFC. All the financial transactions conducted under
11
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
the DIFC are authorized by the DFSA. The DFSA is known for its commitment to
high regulatory standards and thus gives the companies an assurance that they
can establish their businesses on the platform provided by the DIFC and under
its safe regulatory regime.
Another interviewee said that together with other autonomous independent
authorities such as the DIFC courts and DIFC, DFSA amplifies the business
operations of several prominent business corporations of UAE. The other
noteworthy authorities that were instrumental behind the introduction of Islamic
accounting standards are AAOIFI and Finance Ministry of the UAE. Without their
supervision, persuasion and guidance, this task wouldn‟t have reached its
conclusion. In this way, the whole process of the implementation of Islamic
accounting standards was taken care of in the UAE.
6.
Concluding Remarks – Problems in Implementing the ISAs,
Solutions, Research Limitations and Suggestions for Future
Studies
6.1 Problems in implementing the ISAs
This section identifies the main problems in implementing the Islamic Accounting
Standards (ISA). The principal drawback is that, because IFRS concentrates
upon the economic substance rather than the legal form of the transactions,
users of the IFI‟s accounts may not receive sufficient information to form an
informed view on whether the IFI‟s transactions are Shariah compliant. For
example, IFRS accounting for a sale and leaseback transaction where the asset
remains throughout on the balance sheet of the original owner. This can make it
harder to assess whether the sale and leaseback was conducted in a Shariah
compliant manner.
Other challenges in the adoption of Islamic accounting standards are as follows:
First, there is pressure of strict compliance with the religious principles in the
case of application of Islamic Accounting standards. There is a combination of
many Shariah polices which are to be dealt with while evaluating any transaction.
There should not be any transaction which is in opposition of Shariah. These
Islamic accounting standards cannot be applied to all the organisations in an
Islamic country. The Islamic accounting standards can be used only in the
transactions and events which are related to Islamic banks and Islamic financial
institutions(Islamic Foundation, IDB and Loughborough University, 1999).
Secondly, there are a number of differences in the accounting standards set by
IASB (International Accounting Standards Board) and AAOIFI. These accounting
standards differ from the IAS on issues such as lease, restricted contracts, and
specialty investment accounting. Issues of differences between IASB and Islamic
accounting standards arise from Islamic principles. Islamic financial experts
assert that if we run our financial mechanisms according to the international
12
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
accounting standards, it will be a violation of Islamic Shariah law. Islamic
financial institutions emphasize the fact that in order to carry out Shariah
compliant transactions, they need to follow an Islamic accounting systems and
standards as these are based on religious beliefs and principles (Pomeranz,
1997).
Finally, many Islamic financial experts claim that IAS/IFRS were devised from a
western world‟s point of view and are not compliant with Shariah Law (Mustafa,
2003). The two main issues that create problems in the application of
conventional accounting standards for Islamic Financial Institutions are (Mustafa,
2003) which include differences in Objectives of the users of Accounting
Information and differences in contractual relationship between financial
Institutions and their stakeholders.
In addition, some other problems with international accounting standards (IASs)
are also obvious. They are as follow (Hamid, 2012): (a) IASs make entry of those
incomes that are generated in friendly transactions but Shariah contradict them,
(b) IASs do not make entries of Zakat or any other charity income and (c)
conventional accounting system which does not take into account „socially
responsible financing‟.
6.2 Proposed Solutions of the Problems
An overview of the Islamic finance suggests that Islamic finance is based on
basically four issues. As Abdel-Karim (1999) notes:
The parties which work for the solutions of these problems are AAOIFI, local
Shariah board and local regulators. AAOIFI, in particular, has gained a lot of
support in the meantime from a number of institutions and countries such as
Dubai International Finance Centre, Lebanon, Qatar, Pakistan, Sudan, Jordan
and Syria. Kingdom of Saudi Arabia, Australia, South Africa, Indonesia and
Malaysia etc. have also acknowledged the importance of AAOIFI‟s standards and
pronouncements. However, there is pressure on Islamic world for adhering to the
norms and standards set by International Financial Reporting Standards (IFRS)
as they will bring unanimity, harmony and clarity to all the financial transactions
taking place worldwide. Increased pace of globalization has also come up with its
own set of challenges further pressurizing Islamic community to conform to the
International accounting standards (IAS) (Business & Tenders, 2013).
AAOIFI closely followed Shariah principles while devising the accounting
principles for Islamic world countries. AAOIFI, in particular, tackled the following
four issues (Abdullah 2010): (a) misperception & unanimity in understanding
Shariah law, (b) the lack of knowledge of the in-depth finance opportunities, (c)
inadequate number of Islamic financial experts on accounting subjects and the
interested candidates, and (d) shortage of literature & research on Islamic
accounting and banking. AAOIFI not only identified these four troublesome
13
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
issues but also suggested the solutions of all of them. These solutions are as
follow (Abdullah 2010):
Develop a right understanding of the Islamic Shariah law. Articulate the values &
propositions that arise from investing in the Islamic world countries.
Provide proper education and training to the interested candidates on subjects of
Islamic accounting and banking principles. Develop a lot of reading content and
study material regarding Islamic accounting principles by encouraging more
research work on these subjects.
6.3 Research Limitations
The first limitation of the study was related to assessing data. Some Islamic
banks and institutions did not allow us to interview their managers, member of
the Fatwa and Shariah supervisory board, and member of the board of trustees.
We attempted to solve this issue by stressing the benefit that will be gained from
this research and we were quite open and transparent on the results and offered
access to the findings to the interviewers when research is completed. The
second limitation is that answers to interview questions were being based on
perception, knowledge, experience, and truthfulness of individuals. Minor
reporting biases might have crept in while conducting the telephone interviews.
We solved this problem by allowing interviewees to concentrate and give them
ample time to recall all events and influences.
6.4 Suggestions for future research
This paper deals with the history of the Islamic accounting standards and
identifies the role of key players of Islamic accounting standards. Also this paper
conducted interviews to identify the feasibility of adoption Islamic accounting
standards. We suggest for future research that in future studies need to conduct
wider survey in other similar countries (e. g. Pakistan and Jordan) to identify the
feasibility of adoption of Islamic accounting standards. It will be valuable to study
some explanatory variables such as e. g. bank's number, financial environment,
financial statements, shareholders, and investors to explain professionals'
reaction to the risk associated with the implementation of Islamic accounting
standards. In addition, it is recommended to conduct further studies to provide a
more comprehensive comparative analysis of the Islamic standards issued by the
AAOIFI relative to standards on similar matters issued by the IASB.
14
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
References
AAOIFI, Accounting and auditing organization for Islamic financial institutions:
overview, Viewed on 18 March 2013,
http://www.aaoifi.com/aaoifi/TheOrganization/Overview/tabid/62/language/enUS/Default.aspx
AASB, Accounting Standards, Viewed on 18 February 2013,
http://www.aasb.gov.au/Pronouncements/Current-standards.aspx
Abdel-Karim, R. A., 1999, Accounting and Auditing Standards for Islamic
Financial Institutions, accessed on March 15, 2013 from
http://ifp.law.harvard.edu/login/view_pdf/?file=Accounting%20and%20Auditing%2
0Standards%20for%20Islamic%20Financial%20Institution.pdf&type=Project_Pub
lication
Abdullah, D. V., 2010, The Effect of Shariah Principles on Accounting Methods
for Islamic Banks, accessed on March 15, 2013 from
http://www.iasplus.com/en/binary/islamicfinance/islamicaccounting.pdf
Abernethy & Stoelwinder. 1991. Budget use, task uncertainty, system goal
orientation, and subunit performance: A test of the "fit" hypothesis in not-for-profit
hospitals. Accounting, Organizations and Society, 16(2), 105–120
Ahmed, A.A.A., 2012, Accounting in Islamic Perspective: A Timely Opportunity A
Timely Challenge, ASA University Review, Vol. 6, Issue no. 2, pp. 11-31
Ahmed, E. A., 1994, Accounting Postulates and Principles from an Islamic
Perspectives, Review of Islamic Economics, Vol. 3, Issue no.2, pp.1-18. Odiabat,
H., 2010, AAOIFI issues new accounting standards, accessed on March 15,
2013 from http://www.ameinfo.com/239090.html
Albu, N & Albu C 2012, International financial reporting standards in an emerging
economy: lessons from Romania, Australian Accounting Review, Vol. 22, Issue
4, pp. 342-352.
Ali, M 2005, A Synthesis of Empirical research on International Accounting
Harmonization and Compliance with International Financial Reporting standards,
Journal of Accounting Literature, Vol. 24, pp.1-54.
Alves, M & Antunes, E 2011, International accounting standards in Europe: a
comparative study, International research journal of finance and economics,
Issue 61, PP. 64 – 72.
Ashbaugh, H & Pincus, M 2001, Domestic accounting standards, International
accounting standards and the predictability of earnings, Journal of accounting
research, Vol. 39, Issue 3, pp. 417 – 434.
Askary & Saeed 2006, Accounting professionalism – cultural perspective of
developing countries, Managerial auditing journal, Vol. 21 Issue 1, pp. 102 – 111.
Ata al- Sid, M., 2007, Contemporary Attempts at Overcoming Decadence and
Revitalizing Qur‟anic Thought, Business Review, Vol.2, Issue no. 1, pp. 56-75
Bae, K.-H., Tan, H., & Welker, M., 2008, International GAAP differences: The
impact on foreign analysts, Accounting Review.
Baker, C & Barbu, E 2007, Trends in research on international accounting
harmonization, The International Journal of accounting, Vol. 42, pp.272-304.
15
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Belkaoui, A. R. 1994, International and multinational accounting, London, Dryden
Press.
Berelson, Bernard. Content Analysis in Communication Research. New York:
Free Press, 1952.
Bhimani, A. 2008, The role of a crisis in reshaping the role of accounting, Journal
of Accounting and Public Policy, Vol. 27, pp.444-454.
Business & Tenders, 2013, Pressure on Islamic Finance to Adapt the
International Accounting Standards, accessed on March 15, 2013 from
http://www.businesstendersmag.com/economy/international-economy/576pressure-on-islamic-finance-to-adapt-the-international-accounting-standards
Carsberg, B. 1995, Standard setting for the world, IASC Insight, pp.3–4.
Carsberg, B. 1998, Accounting for world harmony, The Banker, pp.18–19.
Cellucci, R, The International Accounting Standard Board, Accessed on 18
February 2013,
http://neumann.edu/academics/divisions/business/journal/Review2011/Cellucci.p
df
Chua, W. F., & Taylor, S. L., 2008, The rise and rise of IFRS: An examination of
IFRS diffusion, Journal of Accounting and Public Policy, Vol. 27, Issue no. 6, pp.
462-473.
Deloitte 2013, Islamic Accounting: background, Viewed on 18 February 2013,
http://www.iasplus.com/en/resources/resource64
DIFC, 2013, Discover DIFC, accessed on March 15, 2013 from
http://www.difc.ae/discover-difc
DIFC, 2013, Dubai Financial Services Authority, accessed on March 15, 2013
from http://www.difc.ae/dubai-financial-services-authority
Din, S 2004, Issues in accounting standards for Islamic financial institutions,
Accessed on 18 February 2013,
http://www.sbp.org.pk/departments/ibd/ISSUES_IN_ACCOUNTING_STANDRAD
S.pdf
Donaldson, L., 1987, Strategy and structural adjustment to regain fit and
performance: In defence of contingency theory. Journal of Management Studies
24 (1): 1-24.
Donaldson, L., 1995a (editor) Contingency Theory. Volume 9 in History of
Management Thought Series, Dartmouth Publishing Company.
Donaldson, L., 2001, The Contingency Theory of Organizations, Sage, Thousand
Oaks.
Dore, L 2007, Modify IFRS to an Islamic format: Study, Viewed on 18 February
2013,
http://www.khaleejtimes.com/DisplayArticleNew.asp?section=business&xfile=dat
a/business/2007/february/business_february750.xml
E Notes 2013, International accounting standards, Viewed on 18 February 2013,
http://www.enotes.com/international-accounting-standardsreference/international-accounting-standards
El Razik, A. A., CHALLENGES OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRS) IN THE ISLAMIC ACCOUNTING WORLD, CASE OF
16
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
MIDDLE EASTERN COUNTRIES, Scientific Bulletin-Economic Sciences, Vol. 8,
Issue no. 14
FASB, International convergence of accounting standards: a brief history, Viewed
on 18 February 2013,
http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264&
Fontes, A, Rodrigues, L & Craig, R 2005, Measuring convergence of National
Accounting Standards with International Financial Reporting Standards,
Accounting Forum, Vol. 29, pp.415–436.
Hamid, K. T., 2012, IBF 8211 (Accounting for Islamic Financial Institutions),
accessed on March 15, 2013 from
http://www.academia.edu/2027832/IBF_8211_Accounting_for_Islamic_Financial
Institutions_
Hamid, S., Craig, R., & Clarke, F. 1993, Religion: a confounding cultural element
in the international harmonization of accounting, Abacus, Vol. 29 (2), pp. 131–
148.
Harris, M, S & Mueller, K, A 1999, The market valuation of IAS versus US GAAP
accounting measures using form 20 F reconciliation, Journal of accounting and
economics, Vol. 26, Issue 1, pp. 285 – 312.
Haskins, E. M., Ferris, K. R. & Selling, T. I. 1996. International financial reporting
and analysis: a contextual emphasis. Homewood, IL: Irwin.
Hidayat, S. E., Challenges in Applying Conventional International Accounting
Standards for Islamic Finance, accessed on March 15, 2013 from
http://www.aaoifi.com/aaoifi/Portals/SutanEmirHidayat.pdf
Hossain, M. A., 2003, International Accounting Standards: An Islamic
Perspective, accessed on March 15, 2013 from
http://www.kantakji.com/fiqh/files/accountancy/v136.pdf
Hui, H. Jiang, Y. Jin Q and Islam, J. 2013, The effects of Standardized Water
Accounting: Evidence from the Water Accounting Standards in Australia, Life
Science Journal, 2013; 10 (3), pp 427 – 432.
IASPlus, 2013, Islamic Accounting, accessed on March 15, 2013 from
http://www.iasplus.com/en/resources/resource64
IFRS 2011, Listing of International Financial Reporting Standards, Accessed on
18 February 2013, http://www.ifrs.com/StandardsList.pdf
IFRS, About the IFRS Foundation and the IASB, Viewed on 15 February 2013,
http://www.ifrs.org
IMF, 2012, UAE: Gross domestic product, current prices, per capita income,
accessed on March 15, 2013 from
http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?pr.x=63&
pr.y=16&sy=2009&ey=2012&scsm=1&ssd=1&sort=country&ds=.&br=1&c=466&s
=NGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CLP&grp=0&a
Investopedia, Accounting Standards, Viewed on 18 February 2013,
http://www.investopedia.com/terms/a/accounting-standard.asp
Islamicbanker.com, 2011, AAOIFI Standards, accessed on March 15, 2013 from
http://www.islamicbanker.com/aaoifi-standards
17
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Kamlaa, R., Gallhofer, S. & Haslamb, J. (2006), „Islam, nature and accounting:
Islamic principles and the notion of accounting for the environment‟, Elsevier Ltd,
Vol. 30, pp. 245–265, available online at http://www.sciencedirect.com.
Karim, R. A., & Tomkins, C.1987, The Shari‟ah and its implications for Islamic
financial analysis: An opportunity to study interactions among society,
organization, and accounting, The American Journal of Islamic Social Sciences.
Vol. 4, Issue no. 1, pp. 101-115
Khan, A. J., 1994, Comment on Paper “contemporary accounting practices and
Islamic banking” by M.A. Khan, Review of Islamic Economics, Vol. 3, Issue no. 2,
pp. 29-30
Maiya, R. V. & Banerjee, B., Banking on Faith: Islamic Banking in the Middle
East, accessed on March 15, 2013 from
http://www.infosys.com/finacle/solutions/thought-papers/Documents/IslamicBanking-in-the-Middle-East.pdf
McGregor, W. & Street, D 2007, IASB and FASB face challenges in pursuit of
joint conceptual framework, Journal of international financial management &
accounting, Vol. 18, Issue 1, pp. 39-51.
Mechell, A. 2009, Accounting harmonization and compliance in applying IASB
standards: An empirical survey about the first time adoption of IAS 7 by Italian
listed groups, Accounting in Europe, Vol. 13, Issue no. 2, pp.231-270.
Moore, P. 1997, Islamic finance, Euromoney Publications, London.
Mustafa, B. G., 2003, The Implementation of Accounting Standards for Islamic
Banks: A Study of Preparers' and Auditors' Opinions in Sudan, accessed on
March 15, 2013 from http://epubs.surrey.ac.uk/1040/1/fulltext.pdf
Nobes, C. 1996, International accounting standards: strategy, analysis and
practice, FT Financial, Publishing and Pearson Profession, London.
Odiabat, H 2010, AAOIFI issues new accounting standards, Viewed on 18
February 2013, http://www.ameinfo.com/239090.html
Paul, A & Burks, E 2008, Preparing for international financial reporting standards,
Journal of finance and accountancy, PP. 1-8.
Paul, D 2009, International accounting system and its major challenges in time,
Journal of Modern accounting and auditing, Vol. 5 , Issue 1, pp. 14 – 19.
Pomeranz, F., 1997, The accounting and auditing organization for Islamic
financial institutions: An important regulatory debut, Journal of International
Accounting, Auditing & Taxation, Vol. 6, Issue no.1, pp.123-130.
Rahman, S., 1997, Islamic Accounting Standards, accessed on March 15, 2013
from http://www.ifew.com/insight/13036mon/accstds.htm
Razik, A, Challenges of International Financial Reporting Standards (IFRS) in the
Islamic accounting world, case of middle eastern countries, Accessed on 18
February 2013,
http://www.adoptifrs.org/uploads/Algeria/Amged%20Abd%20El%20Razik.pdf
Sarea, A. M., 2012, The Level of Compliance with AAOIFI Accounting Standards:
Evidence from Bahrain, International Management Review, Vol. 8, Issue No. 2,
pp. 27-32
SUDIN HARON, 2000, A Comparative Study of Islamic Banking Practices,
Associate Professor, School of Management, University Utara, Malaysia.
18
Proceedings of 9th Asian Business Research Conference
20-21 December, 2013, BIAM Foundation, Dhaka, Bangladesh ISBN: 978-1-922069-39-9
Tag El Din, S. I., 2004, ISSUES IN ACCOUNTING STANDRADS FOR ISLAMIC
FINANCIAL INSITITUIONS, accessed on March 15, 2013 from
http://www.sbp.org.pk/departments/ibd/ISSUES_IN_ACCOUNTING_STANDRAD
S.pdf
Tarca, A., The Case for Global Accounting Standards: Arguments and Evidence,
accessed on March 15, 2013 from http://www.ifrs.org/Use-around-theworld/Documents/Case-for-Global-Accounting-Standards-Arguments-andEvidence.pdf
Tricker, R. (1976). Management information and control systems. London & New
York: John Wiley & Sons Ltd.
Van de Ven, A., & Ferry, D. (1980). Measuring and assessing organizations. New
York: Wiley.
Waterhouse, J., & Tiessen, P. (1978). A contingency framework for management
accounting system. Accounting Organization & Society, 3(1), 65–76.
Watson, D. (1975). Contingency formulation structure: Implications for
managerial accounting. In Leslie Livingston (Ed.). Managerial accounting the
behavioral foundation.
Widener, S. (2004). An empirical investigation of the relation between the use of
strategic human capital and the design of the management control system.
Accounting, Organization & Society, 29(3&4), April/May, 37.
Williams, T. (1989). The trust comptroller and trust compliance. ABA Bank
Compliance, 10(3), April, 38. Washington.
Yusoff, N 2009, IFRS and AAOIFI: Convergence or Harmonization? Viewed on
18 February 2013, http://www.slideshare.net/hasyudeen/ifrs-and-aaoifi-need-fora-merger
Zéghal, D, Chtourou, S, & Sellami, Y, M 2011, An analysis of the effect of
mandatory adoption of IAS/IFRS on earnings management, Journal of
International Accounting, Auditing and Taxation, Vol. 20 Issue 2, pp. 61-72.
19