COURSENAME: FINANCIAL

ACCOUNTING
TOPIC: CASE STUDY
CASE NAME: ISLAMIC ACCOUTING
DATE: 22.FEB.2021
 ISLAMIC ACCOUNTING CASE

INTRODUCTION:
In 1973 the first official Islamic development financing institution named, The Islamic
Development Bank (IDB) was established. They introduced that all the financial
institutions should accommodate their financial strategies in such manner that they stay
within the border of shariah law. Islamic Finance Industry had grown to a greatest
height. According to a State of the Global Islamic Economy (SGIE) report, the total
Assets are estimated to grow to USD 3.2 trillion by 2020. But Islamic Financial
Industry had its fair share of complications as it grown.

QUESTIONS:

Q # 01

Why a separate framework was necessary for Islamic transactions?

A: The Conventional accounting notions that were set by International Financial

Reporting Standards (IFRS) violates some of the principles of Islamic laws which
cannot be adjusted into those standards and also cannot be compromised among
Muslims as it was stipulated by religion. In order to overcome those flaws, a separate
accounting framework was necessary for Muslims to precede financial transactions in
the light of Shariah Law.

Q # 02

What is AAOIFI, When was it founded and what was the purpose of it?

A: AAOIFI stands for Accounting and Auditing Organization for Islamic Financial
Institutions. It is a nonprofit organization which established in 1991. The purpose of
AAOIFI was to develop an accounting framework which can fulfill the requirements
of Islamic Shariah Law and enhace the credibility of financial information produced by
Islamic Financial Institution (IFI) but it was compromised and their objective changed
to enable harmonization of contemporary accounting practice with the IFRS to the
greatest degree possible without conceding the fundamentals of Islamic finance
originating from the Quran and Sunnah. However it developed over a hundred
standards in the areas of accounting, auditing, ethics, and governance in consultation
with leading scholars on Islamic law.

Q # 03

How the difference between conventional accounting and Islamic accounting can be
explained by the definition of asset?

A: There’s a major fundamental difference between conventional and Islamic

accounting. The basic definition of asset under both frameworks distinguishes them
clearly. In conventional accounting, anything which is valuable and which can produce
profit in future is called an asset and to record it on books or statements only substance
is necessary rather than its legal form. While in Islamic accounting the ownership is
mandatory, in order to record an asset on books or statements you must have the
ownership of that asset in legal form.

Q # 04

Did AAOIFI fulfill the task of building an Islamic framework perfectly?

A: At the time of its establishment AAOIFI was the only regulatory body which took a
separate path rather than following the conventional accounting. AAOIFI has involved
the Islamic Scholars to ensure if their framework is according to Shariah Law or not,
which made them a prominent individual. Also they have used modern communication
links to accompany scholars from all around the globe for the development of such
accounting framework that entirely based on Shariah Law. AAOIFI tried to maintain
its image as a modern, market body as well as an Islamic law operator. On the other
hand AAOIFI somewhat failed to continue its work with the guidance of Shariah Law
to lineup with the conventional accounting standards. However the regulatory
documents prepared by the AAOIFI are overflowed with terms which are stated in
Islamic Law but the standards developed in relation to these barely uphold those terms.
Q # 05

How the Islamic accounting does affects society?

A: Unlike conventional finance, Islamic finance aims to keep ethics at the vanguard of
all monetary dealings and stakeholder communications. It intends to “prioritize
transparency, the certainty of outcome and the protection of investor’s liabilities”.
Those in charge of economic resources must be held responsible for all their activities
as their decisions have wider economic and social implications outside the operating
entity. Hence, a major feature of Islamic accounting is that it goes beyond shareholders
and creditors in identifying the users of the provided information and embraces its
accountability to the society at large.

“THE END”