The majority of experts argue that the process of the accounting standards compliance is very complex and expensive.
The economy of Islamic countries depends on the banks and finance companies. Therefore financial institutions aren’t only market players. Their roles are extremely important for the well being of Islamic nations. Thus, the transparent, fair and high quality accounting principles are needed for the Islamic financial institutions’ efficient operations.
The Accounting, Auditing, Governance and Shari’a Standards for Islamic Institutions are developed by the Accounting and Auditing Organization for Islamic Financial Institutions. Unfortunately, they aren’t 100% complied with the global International Financial Reporting Standards, because some of them have unique requirements. (Bianchi, 2007, p.569) Therefore, it could be stated that the standardization of the AAOIFI and the IFRS standards will not be an easy thing to implement.
It should be mentioned that at first disputes around the AAOIFI and IFRS relations suggested the harmonization of accounting standards, but later the debates lead to the requirements of standardization. This aspect is supported by the announcement that could be found in the recent International Financial Reporting Standards. (Bianchi, 2007, p.569)
According to it, ”˜financial statements cannot state that they comply with international financial reporting standards unless they comply with all the applicable standards and not some of them.’ (Hawser, 2010, p.25) It means that the financial statements have to be in the full compliance with the applicable standards, without any exclusion. Only under this condition the statement complies with international financial reporting standards. Simply speaking the compliance has to be completed in the full volume, otherwise it is not accepted.
Islamic Financial Institutions have several reasons for adoption of different set of standards; one of these reasons is the fact that Islamic financial institutions use the functions and the contracts that are different from the functions and the contracts accepted by the majority of banks in other countries. Islamic banks have to use other contracts (in accordance with international law, but not with Islamic law or the Shari’a) to earn profits, because in accordance with the local regulations these institutions can’t receive or pay interest. (Bianchi, 2007, p.270)
As for the specific complications of IFRS adoption, the major difference between AAOIFI and IFRS has to be defined: AAOIFI are the Islamic finance industry specific standards, when IFRS aren’t and the majority of their types can’t be followed in full (the reason is that these principles do not meet shari’a requirements).
For instance AAOIFI suggests using alternative Islamic standards in the following situations:
–Â Â Â Â Â Â When equalÂ IFRS provisions can’t be used in full by Islamic Financial Institutions;
–Â Â Â Â Â Â When IFRS can’t suggest appropriate provision to cover the specific Islamic banking and finance practices. (such as Mudarabah, Musharaka, Salam and Istisna) (Al-Salem, 2008, p. 126)
As for the case when IFRS may be applied, AAOIFI doesn’t suggest equal regulation or there is another option, AAOIFI’s standard provides the development of IRFS if some gaps and differences are found.
In terms of differences between AAOIFI and IFRS, they may be described as a ”˜result of the different structural objectives.’ (Al-Salem, 2008, p. 126)
Therefore it has to be noted that AAOIFI aims to help the development of the standards when IFRS standards aren’t acceptable (because requirements of Islamic Banking do not meet the Shari’a compliance condition). But clearly IASB has to be persuaded by the finance world to be more tolerant in their requirement of full compliance accounting standards, the Islamic and conventional banking, and finance practices.