Relevance means the capacity of information to do a difference in a determination by assisting users to organize anticipations about results of yesteryear, nowadays, and future events or to corroborate right anterior outlooks.
Dependability means the quality of information that assures that information is moderately free from mistake, prejudice and dependably stand for what its intents to stand for. Conventional accounting aims and constructs are needed to steer bing accounting pattern, prescribe hereafter accounting pattern and specify cardinal footings and cardinal accounting issues. The accounting measuring is based on the cost rule that considers the acquisition cost or historical cost. The method that adopts the historical cost and conservativism construct is to guarantee the refund from capital. However, this rule is differing from the Islamic point of position because it does non fit with the construct in Shari’ah about equity and justness. Islamic accounting provides appropriate information to stakeholders of an entity which allows them to regulate the entity is continuously runing within the construct in Shari’ah and presenting on its socioeconomic aims.Furthermore, accounting constructs can be described as regulations, rule, patterns, posits and premise. Based on the construct of conservativism, we know that the basic accounting rule is usage of historical cost for plus rating.
There is an issue raises that Islamic accounting whether the construct of conservativism is relevancy or non. Let us mention to the rules of zakat where zakat must be based on current market value or hard currency tantamount value for the trade assets.The usage of current monetary values on the due day of the month of zakat is the best recommendation from many bookmans. The usage of current market value is wants to happen the most accurate rating of wealth from zakat remunerator to be subjected for zakat.
This is because the rule of zakat design to function the receivers and remunerators for justness and carnival. However, the rule of conventional accounting pattern is taking lower of cost or market value. By utilizing conventional accounting pattern it may take to understatement in the fiscal study of trade assets that subjected for zakat. This sort of cost construct decidedly can non be acceptable in Islam because the preparer of fiscal study in Islam should be aimed for justness and equity every bit good.Accounting acknowledgment is the basic elements of entering in the fiscal statements. The constructs include the basic rules that when is the clip to acknowledge gross, disbursal, addition and loss in the entity ‘s income statement. We should acknowledge the gross when it is realized in conventional accounting positions. Realization of gross occurs when the entity can have the gross with their right and the duty on the portion of another party is remit.
The usage of accrual footing accounting is better than the hard currency footing accounting in conventional pattern but it is in struggle with Islamic accounting as it is claimed to misdirecting and may undervalue the sum of zakat.From traditional position, the fiting rule recognized the disbursal when the disbursal is related straight to bring forth grosss or when the disbursal is incurred in the related period. The equity and justness to the stockholders and stakeholders must be considered during allocates disbursals to related gross harmonizing to fiting rule from Islamic position. The measuring attributes to the fiscal study should be guided by the relevancy, dependability, comprehensibility and comparison of the information being usage by related parties. In order to guarantee the dependability and comparison of the information, it must be supported with nonsubjective, logical and relevant methods, and consistence of the usage of methods and conservativism in the procedure.In footings of revelation demands, traditional accounting position provides limited revelation proviso of information that topic to public involvement. However, Islamic accounting position requires extra revelation in the fiscal study in order to fulfill any sensible demand for information in conformity with the rule of Shari’ah. Their full revelation does non intend to unwrap everything in the study but the preparer of history should unwrap any information that is of import to users for functioning their God.
The Islamic construct of societal answerability encompass the answerability is finally to God.The bulk had point out different review of conventional accounting about its lacks from their ain position. Therefore, the Islamic faculty members are concerns with the issues raised. There is some research workers concern with the application of conventional accounting to Islamic societies in other countries.
The spiritual content is excluded due to the differences between Islam and the history in Western society. The research workers ever highlight this point when the proposed solutions are non compatible with an Islamic.
2 Why the Issue under Discussion is Crucial?
We had found that the current issue under treatment is important because of the deficiency of standardized in accounting. It is difficult for the investor to do their decisionwhen the fiscal establishments apply different criterion in their fiscal study. For establishments offering Islamic finance merchandises and services, the Standards applied may non offer appropriate revelation demands because of the differences and troubles
1.3 Objective of Topic under Discussion
A struggle occurs between the minutess and merchandise agreement to Shari’ah conformity and conventional accounting which may take to a clear deficiency of a individual fiscal coverage model. Therefore, similar entities become hard in make comparison across boundary line on the fiscal study. This deficiency of consistence could be drawback due to increasing demands by investor in IFIs, who look for greater chance in planetary market. This study sets the scene for a wide undertaking which will take to inform the international docket on fiscal coverage by IFIs and back up the work of accounting and scrutinizing standard compositors in this country.The chief aim of this treatment is to find the quality of fiscal study from Islamic and Conventional Accounting Perspective based on the feature of relevant and dependable issue.
The utility of fiscal study is of import to enables users make the right judgements, anticipations and economic determination. We will happen out the statement of the pattern and policy among the two different positions which could act upon the quality of fiscal study. We will further lineations cardinal patterns in Islamic accounting distinct from those found in conventional accounting and that could take to deceits of fiscal information if they were accounted for utilizing IFRS. In the treatment, our group members will show our sentiment under the Islamic and Conventional accounting position based on the statement. Some considerations associating to the specific patterns of IFIs are stated in the organic structure of this study. We hope the findings can farther promote the development of strengthen the fiscal coverage of Islamic fiscal establishments.
2.0 Main Discussion
2.1 How conventional position of accounting perceives or step relevancy
Recognition and measuring construct
Gross should acknowledge when it is earned but non when we received the payment ; disbursals should be recognized when it is incurred but non when we make payment. Even when we receive income or paid disbursals in progress, there are hard currency flow involve, such income and disbursals ca n’t be recognized until it is earned or incurred. Matching rule in conventional accounting is stated that cost incurred should associate to gross produced. Conventional accounting adopted accrual footing and fiting rule in entering fiscal event or dealing harmonizing to GAAP.
By following accrual footing, fiscal statement will supply more dependable figures in showing company ‘s public presentation, net value and their fiscal status and place of that concern entity. However, hard currency footing accounting are claimed to diminish the truth and relevancy of coverage as it emphasis on conservativism and the prudence construct when it is used in income and disbursals acknowledgment.
Accounting revelation is use to inform and direct the both current and possible investors ‘ point to accounting schemes and methods every bit good as any events that would give impact on their several fiscal statement. As increasing competitory in concern universe, revelation become increasing importance as complete and accurate information can hold immense and permanent impact on the stakeholder. Information are need to function difference group of user demand on different type of information on the fiscal statement to do their determination, e.g. employee will necessitate profitableness information of the company to acquire know whether there are possibility of salary rises or fillip sum for that current twelvemonth, internal direction may necessitate to utilize for anticipation and program for the hereafter.FRS 101 provides overall model and duties for the presentation of fiscal statements, regulations for their construction and minimal demands for the content of the fiscal statements.
Fiscal statements as set out by FRS 101 are income statement, balance sheet, hard currency flow statement, statement of alterations in equity, and notes attach toing the fiscal statements. For illustration, the contents in balance sheet such as capital which elaborate information as to the authorized, different categories of portion capital, par value of each portion, issued capital, paid up capital, salvation day of the month for redeemable portions ( if any ) are to be disclosed and dividends collectible. While in income statement such as dividends paid and proposed depreciation, amortisation and decline in value of assets.
The construct defined by proverb as “ anticipate no net income, but anticipated all losingss ” ( Bliss, 1924 ) . The IASB defines prudence as “ the presence of a grade of attending in the exercising of the findings needed in doing the appraisals required under conditions of improbableness, such that assets or income are non overelaborate and liabilities or disbursals are non minimalist. ” If there are two similar conditions arises where both holding acceptable options for describing an point, the comptroller are required to pick the surrogate that will ensue in less net income or less plus sum.
The rule of conservativism leads comptrollers to anticipate or unwrap losingss, but it does so in action for additions. For illustration, possible losingss from cases need to be disclosed ; in contrast potency additions are non be stated. Inventory may necessitate to compose down to the lower than its historical cost, but it will non compose up stock list sum to be higher than its historical cost.Criticism of conservativism claimed that it would non ‘conservative ‘ future income statements ( e.
g. , AICPA, 1939 ) . This is due to those downward-biased estimations of net assets lead to upwards colored appraisals of net incomes in following old ages when those assets are expensed. Therefore, conservativism produces “ non-conservative ” net incomes in the undermentioned twelvemonth. This claim slips the point of conservativism in the diminishing elucidation. There are many grounds for the existing of conservativism impression, for illustration, it is to halt actions by directors and others that decrease the size of the pie gettable to all claimants on the house. Conservatism creates plus and net incomes steps that maximize the existent value of the house. Higher future twelvemonth net incomes because additions are deferred until there is cogent evidence that they are happen and have been earned.
This seems to do them conventional. The circumstance that following net incomes for a given twelvemonth are higher than some Nirvana benchmark for net incomes such as the change in the value of the portions predictable by an comptroller does non do the future net incomes non-conformist. Accountants are anticipated to be impersonal and impartial.
Business entity rule is the concern that seen as a separate entity from its proprietors ( stockholder ) and direction ( board of manager ) for readying of fiscal statements. In conventional accounting, we consider a concern and its proprietors as two separate parties, means that personal minutess of proprietors are separate from concern.Differences of stewardship construct with conventional accounting are possible investors and creditors are non included in user classs, it is non functioning as anticipation theoretical account for the users and it is emphasize on what has been accomplished in the yesteryear. Accounting in conventional positions is to designation, entering, categorization, construing and communicating of economic events so that the user can do usage of the information to efficaciously and expeditiously apportion their resources.
TheA traveling concern principleA is the premise that an entity will remain in concern for the hereafter. In contrary, this means the entity willA notA be forced to discontinue operations and liquidate itsA assetsA in the close term. When the entity is still in the concern and utilizing the assets efficaciously, the comptroller is just in postponing the acknowledgment of particularA expensesA till a ulterior period.
The Conventional accounting which chiefly uses historical cost to step and values of assets and liabilities that bring the profession to paid attending on the unit of measurement premise of the pecuniary unit ‘s restrictions because the utilizing of current value is complex and troublesome.
In communist states, the accounting profession had ne’er developed the conventional accounting as it did non do much economic sense. As spiritual truths can non be verified therefore the disclosure is non reflected a beginning of cognition. Dr.Shahul Hameed & A ; Chapra ( 2000 ) argue that scientific disciplines trade with the physical existence discernible by the senses while faith trades with the higher degree of world with beyond the sense of perceptual experience.The historical cost rule used to mensurate the accounting quality of dependability as there is understanding on the purchase monetary value of an plus in that clip. However, the historical monetary value is non seen as some relevant information. For illustration, value of land in 20 old ages ago may be deserving and valuable much more than the balance sheet.
E.g. edifice are recorded in balance sheet with historical cost and its does non reflect their just value efficaciously as their existent value may increase from clip to clip. Therefore, when describing fiscal information, many comptrollers and users of fiscal statements argued that the market monetary value or just valueA should be used.The chief distinct among these two rules are in their future use of the plus and premises about its utile life.
For illustration other professions, the peculiar informations provide professional valuators balance sentiments and judgements.
2.2 How Islamic position of accounting perceives or step relevancy
From Islamic point of position, the conservativism construct is non relevant for Islamic fiscal coverage, because it will undervalue the calculation of zakat. As Adnan and Gaffikin ( 1997 ) states that the conservativism concept travel against the Qur’an and non fit with Shari’ah. Gambling and Karim ( 1991 ) claim that the construct of conservativism would ensue in underestimation of assets that could be capable to zakat and Khan ( 1994 ) supports their position. Attiah ( 1989, p. 93 ) accents on specific Islamic minutess and says that Islam identifies the conservativism construct on the footing that net incomes can non be distributed in minutess such as mudaraba until the recovery of the capital.We have to believe more extremist, conservativism sometimes travel against Islamic position, but in other instances, it helps to keep public public assistance by restricting over-optimistic ratings and distribution of unearned gross.
In Islamic perspective the contract fulfilment rules is non effectual as it is assume the contract is the base on balls activity and they assume that the historical cost will unwraping of the truth and prohibiting the withholding. However, we are suggest that the utilizing of historical cost is applicable in reflects to the conservativism which will understated the rating.
There is a general harmoniousness in accounting that there should be just and equal revelation of accounting informations. It is expected that any affair of significance will be disclosed if it would impact the determination of an mean investor. From an Islamic point of view, equal revelation is besides one of the coveted rules for just accounting. It provides public with utile information for doing fiscal determinations. Zakah base value and its distribution can besides be accomplished as an result of this rule.Disclose information is chiefly for Islamic community in the first topographic point which the revelation is chiefly to rede the Islamic community about its operation every bit good as usage for internal direction.
Everything that is believed to be of importance to Islamic users for the intent of functioning God should be disclosed. AAOIFI justified its acceptance of this construct by reasoning that it is supported by the Islamic construct of delegating the duty of the cost to the receiver of benefit ( AAOIFI, 1999a, p.63 ) .Decision utility is criticised on whether the information unwrap in the fiscal coverage useful for their several users. In Islamic position, information which helps to finding of zakat, support in measuring hard currency flows that might be recognized from trade with the Islamic bank, sing the Islamic bank ‘s release of its fiducial duty to protection of fund, discharge of their societal duty, and etc. should be disclosed.
Muslim corporations are expected to unwrap consist of any forbidden transection there had made for the twelvemonth, zakat collectible and their societal duty has been done for the twelvemonth, it is more elaborate than conventional accounting revelation. They suggest that Value Added Statement should be applied which have some influence on the company policy so that the company aware of their societal duty such as bonus payment to employees.
Recognition and Measurement Concept
Zakat is of import in the Islamic position in covering with the measuring of timing of the assets. Muslims is encouraged to affect in zakat as to carry through their duties which in line with Shari’ah of Islam. The finding and answerability of zakat in the early accounting development had already provided by the accounting books and studies.In IAS 37, the liability is requires unwraping merely when these three conditions are present: I ) duty, two ) dependable measuring and three ) chance of an escape of resources. While in Islamic criterion, they merely recognize when the information are available indicate an event will ensue in the damage of plus.Hamat ( 2000, p.
404 ) criticises the accrual footing on the evidences that if income from mudaraba funding were to be recognised on an accruals footing, the distribution would necessitate Muslim Bankss to take hard currency from other beginnings before depositors ‘ histories are collected. If these histories turn bad, Bankss would hold to utilize their ain financess to cover losingss, therefore go againsting the status of the mudaraba agreement, which dictates that losingss are borne by the proprietors of capital.From our point of position, the important prejudices created by the usage of allotment processs cast uncertainties on traditional accounting methods, and the lone manner to avoiding some of these prejudices is to underscore the coverage of hard currency flow information.
In concern entity construct it is disagree with the separate entity construct which states that the proprietors and the houses are separate entities and one house is different from another house which means, if bankruptcy occurs, the proprietors is non apt for the debt because in Islamic position they consider such premise are improper and like chancing.
But in my point of position, the offprint of entity may impact the dependability of describing. In normal class of concern coverage, the personal minutess are non counted in the ordinary class of concern dealing and will handle as backdown under the stockholders ‘ equity in the balance sheet. As separate entity construct is non applied, the backdown of proprietors in the house will be dainty as disbursals and therefore overestimated the disbursals that result in income underestimated and doing the inaccuracy of fiscal coverage.
2.3 Comparison of Reliability and Relevance in Financial Reporting between Islamic and Conventional Accounting Perspective
From the amplification and account how each of them ( Islamic and conventional position ) in fiscal statement step or perceive dependability and relevancy construct, we will further look into the similarity and differences between these two accounting position in intervention of dependability ad relevancy construct in showing their fiscal statement.
1 Similarity of Islamic and Conventional accounting position of fiscal
statement toward dependability and relevancy
Although Islamic Bankss and conventional Bankss are operate in a different manner but it does n’t intend that they are perfectly different fiscal establishments which need different accounting. Difference accounting rules adopted by difference groups of fiscal establishments which their purposes and aims are besides difference. Hence, all rules and processs which keep equity and justness are adopted in accounting for Muslim Bankss.
The concern and the proprietor are to be viewed as separate entity, income derived from concern is non deemed to be income of the proprietor but the concern itself. The fiscal accounting information shows the activities of the concern entity but non the proprietors.“ Khan ( 1994 ) argues that entity concept suffer from some incongruousnesss proprietary construct is nearer to the Islamic model since it is non clear who is the ultimate proprietor of the concern and since zakat has to be calculated on the belongings of persons.
”[ Christopher Napier, 2007 ]The posit is accepted in Islamic though, because the computation of zakat is based on the belongings of an persons but non based on the concern. In a partnership or corporate, the concern are non belongs to an person merely, so it is non just to see the entity as the proprietor.
The Going Concern Postulate
Harmonizing to the posit, except the entity has face to settlement, it will go on for an limitless period of clip.
Therefore, the fiscal statements are lone portion of a series of uninterrupted studies. This premise does non look to reject by any of the Islamic rules.“ In Islamic law there is a rule similar to this posit, that is, the rule of “ retaining ” or “ accompaniment ” ( Istishab ) . This rule means retaining any event or finding of fact experienced in the past, until grounds is found that this event or finding of fact has changed. Hence if a individual is known to be, his being is non denied boulder clay grounds to the contrary. ”[ Review of Islamic Economics, Vo1.
3, No.2, ( 1994 ) , pp. 1-18 ]This means that the entity is traveling concern or continues operation if there is no grounds to province that the entity is traveling to discontinue their operation or settlement.
There is a general harmoniousness in accounting that there should be just and equal revelation of accounting informations. It is expected that any affair of significance will be disclosed if it would impact the determination of an mean investor. In conventional accounting, an entity whose fiscal statements comply with all the demands of MASB criterions must unwrap openly and perfectly such conformity in the notes ( FRS 101 ) .From an Islamic point of view, equal revelation is besides one of the coveted rules for just accounting. It provides public with utile information for doing fiscal determinations. Zakat base value and its distribution can besides be accomplished as an result of this rule.“ In acknowledgment to this fact the Financial Accounting Organization for Islamic Banks and Financial Institutions suggests that the fiscal statements of Islamic Banks and Financial Institutions include information about beginnings and utilizations of Zukah and Qard Hassan financess. ”[ Review of Islamic Economics, Vo1.
3, No.2, ( 1994 ) , pp. 1-18 ]Merely if the accounting rules are maintained, the utility of information in Islamic fiscal establishment merely can be realised.
2.3.2 Differences of Islamic and conventional accounting position of fiscal statement toward dependability and relevancy
Muslim accounting provides information to an entity which enables them to guarantee the concern is runing continuously harmonizing the Islamic Shari’ah rule. It is governed by Al- Qur’an and Sunnah or Islamic Shari’ah. While conventional accounting provides information from expeditiously use the resource available to accomplish most efficient and maximal profitable in the market and to doing a right determination by possible investor.
It is governed by accounting and commercial jurisprudence and secular moralss.
User ‘s position of dependability and relevancy from both conventional and Islamic position of accounting
In order to condemn a revelation of the fiscal statement to be either relevancy or dependability, we should understand the demand and outlook of the information toward that relevant user. There are conventional and Islamic user demand different types of information in the fiscal statement.Conventional investor may concern on the hazard built-in, return on investing and the house ‘s ability to pay dividend whereas Islamic investor may concern on whether the company has conformity of their investing with Shari’ah and any permissibility of dividend can be received. Therefore, the profitableness shown in the income statement become less relevancy to Islamic investor but is the precedence for conventional investor to put their plus in that company.Governmental regulator may necessitate the information revelation in conventional fiscal statement to maintain path on the house ‘s resources and activities every bit good as revenue enhancement policies but they may hold different outlook on Islamic concern ‘s fiscal statement.
They may concern on accounting policies adopted by Islamic company that may act upon zakat computation, monitor their operational activities and their income whether it is allowable or non-permissible. So, accrual footing is replaced by hard currency footing in acknowledgment of their income and disbursals and conservativism construct are non acceptable in Islamic accounting as they are seem to undervalue the sum of zakat. Fair value is encouraged to utilize in presentation of balance sheet instead than historical cost that adopted by FRS due to better in truth and dependability of the figure in balance sheet. In suit with demand of the Islamic user, some constructs that are normally used by conventional accounting are disagreement by Islamic research worker and go irrelevant in Islamic point of position.
Treatment of accounting theory and premise
Recognition and measuring
Accrual footing and hard currency footing are two type of acknowledgment of income and disbursals and each of the bases exist for the intent to do fiscal statement for meaningful and relevant to the user ‘s demand or outlook.
Accrual footing adopted by conventional accounting are recognised income when it is earned and disbursals when it is incurred. Both of them have no influenced by hard currency reception or escape.IAS 37 requires revelation of a liability when chance of an escape of resources and dependable measuring are present.The Islamic criterion requires acknowledgment when information becomes available bespeaking that an event will most likely consequence in the damage of an plus. The issue of uncertainness is non addressed and the criterion does non see the acknowledgment of a eventuality.[ Thea Vinnicombe* and David Park, CPA,2007 ]Contingent liabilities and proviso are needed to be unwraping in fiscal statement as there is a chance of an escape of resources.
This may better the dependability and relevance of fiscal statement as all possible possibility are take into history to bespeak the fiscal place of a company. However, Islamic accounting is emphasis on the event that consequences in damage of plus. We think that Islamic organisation become less dependable and relevant when touching on the future event and uncertainness revelation.Recognition of resulting rights and duties must use to a given period of clip following all alterations of consummated minutess that may hold taken topographic point.
Measurement is the quantification of fiscal effects of consummated minutess and the impact of other events during the same period of clip.[ Dr. Seif I. Tag El-Din, October 2004 ]Income and disbursals recognize in conventional fiscal statement is based on accrual footing, in contrast, hard currency reception footing are adopted by Islamic position of accounting. The hard currency footing attack are claim to better truth of fiscal place of a company and the company will enforce zakat based on their existent net income for the twelvemonth but non include the income non yet receive and disbursals non yet paid.Accrued gross ( end product ) will reflect the existent degree of the establishment ‘s activity whilst matching of accrued disbursals ( input ) portrays its efficiency.
Net income or return of investing so measures the productive capacity or net achievement of the establishment. If hard currency footing is adopted, the result would be net runing hard currency flow and non income ( Hicks, 1980 ) . The net operating hard currency flow is utile for determining the distribution policy every bit good as run intoing other duties ( Lee, 1981 ) .The importance of just distribution in Islamic funding activities has besides influenced the demand for hard currency footing accounting. Since the basic rule of distribution in muerabah minutess is that merely income realized in hard currency can be distributed, net income to the investing history holder is the investing excess.[ Syed Musa Alhabshi, 2002 ]Again, grade of relevance and dependability depend on the users ‘ classs and their outlook against information.
Both accrual and hard currency footing are relevant to the investor as they may necessitate the information to measure the existent gross gaining and net incomes for the twelvemonth and find the company ‘s liquidness
The conservativism of conventional coverage which applies the lower of historical cost or cyberspace realizable value footing is applied to move in the involvement of equity holders. In Islamic funding, the preferable graduated table of step has been net realizable value or hard currency tantamount value, besides known as the issue monetary value ( paragraph 89 in AAOIFI, SFA 2, 1997 )[ Syed Musa Alhabshi, 2002 ]The chief difference of intervention of conservativism construct is due to zakat computation. Islamic research worker argues that it will underprovide addition of a company and it may take to undervalue zakat sum.Gambling and Karim ( 1991 ) , the proviso of information relevant for zakah, the construct of conservativism is non relevant for Islamic fiscal coverage intents, nor is the usage of historical costaˆ¦aˆ¦.all the minutess harmonizing to their consequence on assets and liabilities and proprietors ‘ equity, this would switch the focal point of Islamic fiscal coverage from a revenue-expense attack to an asset-liability attack for income measuring intents, which implies that the gross acknowledgment and duplicate rules would be become less important.[ Christopher Napier, Aug 2007 ]As the conservativism construct are claim to potentially underestimate zakat sum, the information provided utilizing that construct are seem irrelevant to determination devising of Islamic user of fiscal statement.
Islamic research worker claimed that this construct tend to misdirecting user.Belkaoui ( 2000, p. 179 ) describes it as “ an exclusion or modifying rule in the sense that it acts as a restraint to the presentation of relevant and dependable informations ” . He farther suggests that it may ensue in the debut of prejudice, mistakes, possible deformations and deceptive statements. Hendriksen ( 1982, p. 83 ) describes it as “ at best, a really hapless method of handling the being of uncertainness in rating and income, and at worst, it consequences in a complete deformation of accounting informations ” .
[ Christopher Napier, Aug 2007 ]The Islamic position of conservativism construct is wholly different from conventional accounting. The formation of this construct is chiefly to forestall direction from prejudice.Devine ( 1963, p.130 ) argued that bourgeoiss tend to slant their representations, and their statements are hence frequently biased to favor their immediate ends ; therefore, conservativism is used as counter-bias.[ Christopher Napier, Aug 2007 ]It is still relevant to conventional fiscal statement ‘s users as by utilizing conservativism construct to minimise earning as comptrollers are expected to unwrap loss but non derive in uncertainness arise.
There are different significances of “ full revelation ” between conventional and Islamic position of accounting chiefly based on their several aim. The first position define full revelation when all information topic to public involvement are being revelation whereas the latter define it as full revelation when it is satisfy any sensible demand for information in conformity to Shari’ah are being disclosed.
Muslim corporations are expected to unwrap consist of any forbidden dealing there had made for the twelvemonth, Zakat collectible and their societal duty has been done for the twelvemonth, it is more elaborate than conventional accounting revelation.Baydoun and Willett ( 2000 ) considered the historical value balance sheet should still be used because of the jobs associated with current value such as aˆ¦..The rules of full revelation and societal answerability require Islamic concerns to publish such a statement, and current value information is besides necessary for the finding of zakah.AAOIFI justified its acceptance of this construct by reasoning that it is supported by the Islamic construct of delegating the duty of the cost to the receiver of benefit ( AAOIFI, 1999a, p.63 ) .[ Christopher Napier, 2007 ]In order to congratulate with Islam ‘s aim of taking justness and just distribution of wealth, they suggest that Value Added Statement should be applied which have some influence on the company policy so that the company aware of their societal duty such as bonus payment to employees. Besides that, it is besides used by the populace to implement the company to be more cognizant of their societal duty.
However, income statement has no such tool.Value Added Statement ( VAS ) should be applied. This is because the distributional features of the VAS would back up answerability in Islam ( Baydoun and Willet, 1994 )The job in the VAS is that, it does non supply a infinite for such consideration as it is merely concerned with the distributional facets of the beginnings. Therefore, in the author ‘s sentiment, it can be said that the VAS is deficient in run intoing the Islamic demands for information[ Rizal Yalya, 2004 ]The map of VAS is still a inquiry grade as it is an ex-post study and it has no affect current twelvemonth public presentation. VAS is an extra revelation comparison to conventional accounting.
It may function as an obvious difference between these two positions under our treatment. But the relevances are still limit to Muslim user of history and seem non relevance for conventional usersMoslems have to give themselves to God as the cardinal facet of their behavior. Baydoun and Willett ( 1997, p.6 ) suggest that this construct gives rise to a broader construct of answerability than that present in Western societiesIn the Islamic model, all people are accountable to God on the Day of Judgement for their actions during their lives.[ Christopher Napier, 2007 ]From these sentences, we can acquire to cognize Islamic accounting are fundamentally following Shari’ah jurisprudence which believe to be God ‘s regulation and guideline to His truster. Therefore, the definition of dependability and relevancy toward full revelation may besides difference between these two accounting position. The differences between Islamic and conventional accounting are their aim of supplying the information, the type of information to be disclosed, and measuring and value the information and the users group of that information.
Islamic bookmans disagree aˆ¦ .
duties are separate from its proprietors is consistent with Islamic rules. Gambling and Karim ( 1991, p. 36 ) note that Islam has been slow to admit the thought of concerns as separate legal entities, while Khan ( 1994, p. 9 ) notes that there is an ethical job associated with covering with a company as a separate entity, as the proprietors are non apt for the company ‘s debts in the event of insolvency, but have the rights to residuary net incomes.[ Christopher Napier, 2007 ]The intent of stewardship is to avoid or forestall proprietor take whatever their privation from the concern, e.g.
if the proprietor use the concern ‘s money for personal use, the leger should be entries with “ backdown ” but non “ disbursals ” . This separation may assist revenue enhancement governments to place the nature of disbursals whether allowable or non-allowable. Islamic accounting rejected entity construct due to the narration of “ no 1 can possess wealth in Earth as all things are belong to God, human is merely the representative of God in implement and execute duty on land ” . If there is no entity theory, the procedure of accounting may be confounding the user of fiscal statement whether such dealing is make by proprietor itself or the company. In other word, the information provided in the fiscal statement is non dependable and relevancy by the users. For illustration, if the proprietor borrow money from bank and put it in the company, the book recording will demo in ‘shareholder equity ‘ with entity theory.
Without entity theory, the entry will be merely “ borrowing ” . There are important differences in recognized these two footings in conventional accounting. We think that personal dealing should non be included in fiscal statement as it is non an ordinary class of concern.
Both historical cost and current cost are used to mensurate the accounting quality of dependability as there are understandings on the purchase monetary value of an plus in that clip. We can reason that current cost rating used in Islamic accounting because they believe that historical cost will underestimated in balance sheet.Current cost rating are acceptable in Islamic accounting pattern as they claim that historical cost seem to undervalue the plus of a company. Zakat is calculated based on current rating but statement originating stating that historical cost computation may be supply extremely dependable beginning of information about the fiscal place of a company. The other research worker oppose the former statement by stating that usage of historical cost could dishonest the rules of unwraping the truth ( Al-Qur’an 2:42 ) .
[ Malaysian accounting reappraisal. Shahul Hameed Mohd. Ibrahim, July 2005 ]In drumhead, we think that current cost is better reflect current fiscal place of an company. This is because it can better the truth and dependability of fiscal information. While, sometimes historical cost have been used if stewardship is concerned.
Historical cost reflects plus values at the clip of acquisition and the contracts are written in historical cost Numberss. The advantages utilizing historical cost are less dearly-won and simple to understand and utilize. Therefore, both historical cost and market merchandising monetary values are besides used in Islamic accounting.Based on the Mirza and Baydoun statement, the historical cost for plus, debts, house operations and hard currency direction is a dependable beginning, they besides believe that construct of stewardship in Islamic accounting is good based on historical cost. But based on the Shari’ah, the historical cost will non be applied as it focuses on the current rating method.[ Would the Objectives and Characteristics of Islamic Accounting for Islamic Business. Rizal Yaya, Disember 2004 ]
The traveling concern construct in conventional accounting is non oppose with the demands of Muslim accounting.
The chief things is the manager should do appraisal on the house ‘s ability to go on as traveling concern. All fiscal statement have to prepared harmonizing the regulations of traveling concern. But if the managers want to neutralize or discontinue the houses, it can be avoided. In Islamic position, concern continues non everlastingly but depends on contractual understanding between parties. The entity may continues in the hereafter until the ability of traveling concern has ceased. E.
g. an entity which based on Mudharabah have to be in operation merely to the terminal of in agreement Mudharabah period in the understandings.Harmonizing to the posit, except the entity has face to settlement, it will go on for an limitless period of clip. Therefore, the fiscal statements are lone portion of a series of uninterrupted studies.
However, many comptrollers disagreed and argued about this posit as an unreasoning and pathetic premise. This premise does non look to reject by any of the Islamic rules because there is a rule similar to this posit, the rule of “ retaining ” or “ accompaniment ” in Islamic law.[ Accounting posits and rules from an Islamic position. Eltegani Abudslgader Ahmed, 1994 ]
2.4 Critical Argument on Comparability of Reliability and Relevance in fiscal coverage from Islamic and Conventional Accounting Perspective.
The issue of dependability and relevancy of information being unwrap in the Islamic and conventional coverage being discuss in our assignment. Conventional accounting pattern has develop a standard international set of accounting pattern which have been widely adopted by assorted state but the job originating for Islamic state. Muslim states are trusting on Shari’ah jurisprudence in developing aim of falah which mean to the success in the universe and afterlife.
Many construct explain above that propose and implemented by the conventional accounting are found non appropriate for Islamic accounting due to the prohibition of involvement, involve in stock exchange which serve as gaming in Islam and besides guess. Besides that, there are difference between aim of conventional concern and Islamic concern.Normally, net income maximization are the chief aim of non-Muslim organisation, whereas such nonsubjective of Islamic organisation are chiefly societal oriented which mean that net income is their secondary net income and societal duty is their primary aim.
A house to be acknowledging as success from Islamic position is view from sum of societal activities had been done for the twelvemonth instead than sum of net income has been earned. Islamic accounting assumes that all people are act candidly and dependably as they are believed in Allah has watching their act. Zakat is the chief concern in Islamic accounting which is a tool to set up aim of every bit distribution of wealth in Islamic spiritual. Some constructs in conventional accounting are argue and disagreement by Islamic research chiefly from the position of Zakat. For illustration, conservativism theories are stating to misdirect the fiscal place of a company and therefore take to undervalue the sum of Zakat.From our group ‘s point of position, Islamic accounting may non efficaciously show their dependability and relevant in their manner of showing their fiscal statement as we are disagree some conceptual model proposed by Islamic accounting. Although they argue that the information prepare are non chiefly for the investor or even their creditor but provide chiefly for calculation of Zakat.
We think that this may non fair to other user of the statement particularly for the investor that to a great extent rely on the fiscal statement in doing determination. We ca n’t presume all investor of Islamic company are Muslim! E.g. If a state did n’t open their trade to the universe, they will remain in their boundary line forever and ca n’t even travel on to better life! We think that in order to guarantee better economic which lead to better societal life, Islamic organisations should open their arm to the universe and follow the measure of the universe. This would do an betterment to states economic and increase the employment rate.
If people get occupation, they can bask better life. Remember that God wo n’t fault you to do good life for others! We think that by making so, Islamic company can even absolutely execute their duty toward societal or hapless people.In term of statement for historical cost and current cost, we are agree with Islamic accounting position as we think that current cost are better reflect current fiscal place of an company.
This is bettering the truth and dependability of fiscal information which utilizing current cost rating. We besides assent the position of Islamic bookman on money measuring construct. Event recorded in accounting are step in term of money which standardize a common denominator but in fact it is deficient to reflect a company fiscal place efficaciously.
Inflationary environment affect buying power of money and farther affect future fiscal right duty. Money is unable to function merely and honest unit of history merely. But even today, research still ca n’t establish suited replacement of money term.Disagreement originating on the entity construct due to the stockholder has limited their liability on the bankruptcy of a company but they can bask the residuary net incomes which seem to unlawful in Islamic. Limited liability is mean by the stockholder has protected to restrict their debt within their investing in such several company but non over their personal belongings. Islamic accounting propose that if the proprietors become belly-up, so the liabilities may be distributed to their replacements or legal heirs, and, it will be better for the proprietors because he will be asked for it in afterlife [ Al-Qur’an, 23:115 ] .
We think that everyone have to bear on the effect they had brought in themselves but non implicate their descendants to set about their debts. In the same topographic point, God had gift us an independent organic structure and head so we can take up determination ourselves but non by regulation. If the construct proposed by Islamic accounting had become official construct in Islamic position, it becomes a “ must ” . We think that descendants “ should ” bear their parent debt in the ethical sense but non a “ must ” .
Islamic position of revelation required extra revelation over conventional accounting which is societal answerability. Stakeholder involvement is the chief concern of Islamic position of revelation. Islamic Social Reporting ( ISR ) is functioning as a manner to carry through the demand of revelation in Islamic accounting. In IFRS, the intent of accounting is to supply relevant and dependability of information for the user to doing determination. All information associating to the organisation should be disclosed objectively and wholly in fiscal statement.
However, Islamic accounting concern on ethical revelation as the answerability to the state, because Allah [ SWTA ] knows everything what we conceal and unwrap [ Al Qur’an, 14:38 ] .Will the house unwraping negative information to the populace about their organisation such as unjust intervention of employees, environmental pollution, rip offing income revenue enhancement computation, etc? Islamic accounting did non bring forth a standard computation or feature on how to see such company are just intervention to their employee, environment pollution or accomplishing just societal duty. Net income can demo us an sum but societal oriented accounting ca n’t flush demo us a figure to warrant a good company.On the other custodies, our group might non hold with Islamic accounting position in statement of traveling concern construct and entity construct. In Islamic context, traveling concern construct and entity theory are disagree by Islamic research worker in the account of “ no 1 else can populate everlastingly except Allah ” and “ no 1 can have wealth or belongingss in the universe except Allah ” . If we do non presume that the entity is traveling concern, this would be misdirecting to fiscal statement user.
Without traveling concern theory, all dealing should be complete in that twelvemonth and no uninterrupted consequence should be carried frontward to the following twelvemonth. Commissariats for estimation liability such as dubious debt and guarantee cost are besides prohibited as Islamic accounting is merely concern merely current twelvemonth.While the prohibition of partaking in involvement based minutess is clearly cardinal to Islamic finance, it must be noted that the usage of discounted hard currency flows is simply to deduce an estimate of a market value.
It does non ensue in an involvement charge. Does this hence needfully do a struggle with Shari’ah? Many Islamic fiscal establishments explicitly refer to utilizing discounted hard currency flows when ciphering value in usage for impairment testing and rating techniques for their fiscal instruments measured at just value. We think that the first measure for Islamic research worker to look into deeply in Islamic context for the significance of “ involvement ” that being prohibited but non censor all word with “ involvement ” .Although we found that there are jobs in Islamic position of accounting but due to the increasing demand on the Muslim user of fiscal statement, we think that we should look into the job and happen the solution or recommendation ( as below ) for the relevant parties to do betterment on these issues.
Principle of Conventional accounting stated that cost incurred should associate with the gross were produced, Conventional accounting besides adopted accrual footing and fiting rule when executing entering fiscal event or dealing harmonizing to GAAP. By following accrual footing, fiscal able to supply a more dependable sum or figure in showing fiscal study of the company, non merely fiscal study and besides net value, their fiscal place and status of the concern entity. Cash footing accounting is non that truth and relevancy of coverage as it emphasis on conservativism and the prudence construct when it used in income and disbursals acknowledgment.
Principle of conservativism will take comptroller to unwrap losingss, but it does so in action for addition. Historical cost rule is used to mensurate the rating of plus and liability, it will better the accounting quality of dependability as there are understandings on the purchases monetary value of plus, but historical cost rule is non seen as some relevant information, it will disregard the depreciation or grasp or the plus. Many of accounting professional argues that, in showing fiscal statement market monetary value or just value should be used.For Islamic accounting, preservation construct is non relevant with Islamic fiscal coverage ; it is because of it will undervalue Zakat. Conservation sometimes goes against Islamic position ; it helps to keep public public assistance by restricting over-optimistic rating and distribution of unearned gross. From Islamic position of point, equal revelation is one of the coveted rule for just accounting, it provide public with utile information.
Zakah base value and its distribution can besides be accomplished as an result of this rule. Zakat is of import in the Islamic accounting rule in covering with the measuring of timing of its plus, to carry through their duty which in line with Shari’ah of Islam. The aim of Islamic position is to guarantee the entity is harmonizing to the Shari’ah and its construct of equity, precedences to society and conformity with concern value. Islamic accounting rule used historical cost rating for plus rating to fulfill the stewardship nonsubjective and market merchandising monetary value is used to cipher Zakat. Monetary is unbelievable from Islamic position in an inflationary environment. In Islamic position, the accounting information is to giving satisfaction of the answerability to god and to seek Allah ‘s pleasance and non merely concentrate on stuff merely. It is non dependable to single stockholder and creditor to do determination.
Conventional accounting utilizing historical cost to mensurate the rating of plus and liabilities, and it is deficient for the rating of concern determination. Historical cost is non relevant to the determination devising. Conventional accounting focal point on the stewardship map of accounting, but user of accounting information will non merely interested in the stewardship map. They are more interested in additions or lessenings in the value of they invested and it besides presented on the net plus of the company.
In our recommendation, we suggested utilizing market monetary value or just value to mensurate the plus cost. The chief advantage of this is increase the relevant for determination devising. The market value provided a better nowadays on the economic world of dealing. Because of this, its tend to supply a more utile and relevant information on fiscal study to user. Other than that current cost besides gives a better measuring toward the efficiency of the entity.Implement event accounting is utile to better relevant of conventional accounting.
The concern dealing or activity treated as an event. The informations maintained real-time in the database, and it able to direct accessed by user when they are needed. This non merely record dealing alteration of plus and liabilities, but it besides included program, control and besides estimated and calculating. Event accounting able to better the relevant of accounting study, it is because it analysis from position of of import qualitative feature. This approached able meet the trial of safeguarding accounting information unity.For Islamic accounting rule, Monetary is unbelievable from Islamic position in an inflationary environment. In Islamic position, the accounting information is to giving satisfaction of the answerability to god and to seek Allah ‘s pleasance and non merely concentrate on stuff merely, due to this, the dependable on Islamic accounting study will be decreased.
We strongly recommended that Islamic accounting should utilize pecuniary for present their fiscal position or status. It able to sustainable the flat economic end product and further a more stable monetary value system. Mean it able to maintaining the rising prices at a lower rate. So the person can establish on the information to do determination since the information is much more dependable.We besides suggest that, IASB should corporate with the AAOIFI, it besides might work together with other Islamic fiscal regulative or standard.
This action is to set up the spread between conventional accounting and Islamic accounting to accomplish the needful bargain user, such as doing the information nowadays in accounting study more relevant and more dependable. This besides should include the reappraisal nomenclature in IRFS. The chief intent of this formation is make betterment on each rule, it let them to interchange thought and knowledge on accounting issue, it able to assist up betterment on dependable and relevant of accounting information. Its will play a really of import function for future betterment of accounting coverage.