Exercise 13-8 Liquidity Analysis And Interpretations Lo P3
Posted By Admin @ Mar 02, 2022
Posted By Admin @ Mar 02, 2022
Tittle: Report on Accounting for Islamic Financing Transactions
Accounting and finance
Accounting For Islamic Financing Transactions
Introduction of the Islamic finance institutions
The aim of this assessment is to provide deep insights regarding the financial reporting of Islamic finance institutions. The rules of IFRS are designed by keeping the conventional accounting techniques in mind and are not considered suitable for application in the IFIs (Islamic Financial Institutions). AAOIFI has established the rules for the IFIs. For harmonizing the financial reporting of Islamic finance institutions there are many issues that should be addressed before harmonizing the financial reporting of IFIs. The key issuers which may occur include recoding of interest, time value of money, smoothing expectations, less balance sheet, etc.
Reviewing the Report “Global alignment: bringing consistency to reporting of Islamic finance through IFRS.”
Financial reporting regarding Islamic Finance
In many countries around the world, many organizations prepare their financial statements and perform financial reporting according to the standards set by IFRS (International Financial Reporting Standards). The rules of IFRS are designed by keeping the conventional accounting techniques in mind and are not considered suitable for application in the IFIs (Islamic Financial Institutions). AAOIFI has established the rules for the IFIs. The main conceptual issues which arise here is to state whether the financial reporting of financial institution is different from conventional financial institutions or not. Another issue is that if Islamic accounting principles have to apply for financial reporting than these principles should be properly defined ( ACCA and KPMG, 2012).
Key issues of harmonizing the financial reporting of Islamic finance
For harmonizing the financial reporting of Islamic finance institutions, there are many issues that should be addressed before harmonizing the financial reporting of IFIs. The key issuers which may occur include recoding of interest, time value of money, smoothing expectations, less balance sheet, etc (Elsiefy, 2014). The treatment of Islamic finance transactions is different from conventional financial institutions. Therefore, it is important to understand how these transactions are going to be recorded accurately in the light of financial reporting standards. The report has highlighted various issues which occur in harmonizing the financial reporting which are reviewed below:
Time value of money of the Islamic finance institutions
In Islamic finance the interest is strictly prohibited. Islamic finance institutions do not perform those transactions in which interest is involved. In other words it can be said that this is one of the major factors that differentiate Islamic Finance Institutions from conventional financial institutions. Under IFRS the market value is evaluated using the discounted cash flow model. The time value of money is evaluated using interest rates. It means that IFRS can be applied in Islamic Institutions because Sharia principles do not allow interest (Abdul-Rahman, 2009).
Matching rules with principles of the Islamic finance institutions
The rules and regulations of IFRS are different from the rules and regulations which AAOIFI have establish. In other words there is a clear difference between the practices of IFRS and the practices which AAOIFI has developed for the IFIs for recording the financial information. As discussed earlier when the AAOIFI is implemented in the organization it becomes very difficult for the organization to implement IFRS along with AAOIFI. There is a need to create such rules and regulations throu8gh which IFRS can be implemented in the Islamic financing Institutions (Bellalah & Masood, 2013).
Interest of the Islamic finance institutions
The interest rate factor is a major issue and a major factor that distinguishes conventional financial institutions and Islamic financial institutions. In Islamic financing the Interest is prohibited which means that the Islamic financial institutions will not perform such activities in which the interest is involved. The IFRS have the treatment of interest however as Islamic bank does not include interest various transactions are treated according to the rules set by AAOIFI ( ACCA and KPMG, 2012).