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Posted on May 5th, 2014, by

  1. The ways Islamic Financial Institutions can prepare for IFRS standards adoption

The companies realize that there is a number of possible positive and negative prognoses for them in the context of international accounting standards convergence. In order to meet the possible challenges, institutions should prepare to the IFRS introduction. They need to understand the differences between AAOIFI and IFRS and also these companies that want to gain some advantages, have to be capable to provide the estimation of the potential impact of these differences.

The following steps could undertake n by the companies in order to be ready for accounting standardization:

  • IFRS Framework should be researched; (Pacter, 2003)
  • Foundational concepts of IFRS should be also learned; (Pacter, 2003)
  • Accountants should be capable to do so called professional judgments’; (Pacter, 2003)
  • Accountants should be active participators of the process of standardization ; (Pacter, 2003)
  • IFRS have applied from the AAOIFI perspective in any case; (Pacter, 2003)
  • The global perspective should be considered by the company. (Pacter, 2003)
  1. Potential risks of accounting standardization of Islamic Financial Institutions

Unfortunately, many companies will face with the issue of high cost of IFRS adoption. The expenditures may appear to be even higher than benefits these companies may receive. Therefore we may conclude that the first negative effects that will be made on the companies are costs that will possibly exceed benefits. Another possible risk brought by convergence is that it’s not wise to concentrate on it under current economic conditions. Instead businesses should be focused on rebuilding and reacquiring of their market positions. Finally, another issue is related to the workforce competent in the AAOIFI.  There is the lack of the workforce competent in these standards and it has a crucial importance because of the speed and degree of changes. The presumption could be made that the large part of workforce is not prepared to the process of standardization.

The introduction of the new set of accounting principles is a disputable issue. Expertise of IFRS is relatively limited in Islamic countries. In addition there is a question, since IFRS is a set of accounting principles accepted by more than one hundred countries, should Islamic educational institutions incorporate IFRS too?  What about the education, who will be responsible for teaching these new accounting principles? Will the educational institutions willingly include the new standards and are they ready to it?

Conclusion

According to Al-Salem (2008, p.125), the financial world has seen the consequent emergence of Islamic banking in previous decades and actually it is one of the most significant trends of global finance industry.

As for the problems faced by Islamic Financial Institutions, they are often ethical and human rather than simply technical and professional, and therefore adoption of the international accounting standards would help to improve the trustworthiness of Islamic banking by Western financial institutions.

According to Bianchi (2007, p.270), the broad reforms, transparency and uniform standards are required for the further development of Islamic banking industry. The adoption of the IFRS in addition to the AAOIFI by Islamic Financial Institutions may become the moral compass that will guide the Islamic finance sector in the global finance industry. In addition, globalized economy influences the Islamic finance sector by increasing competition. Therefore, this industry has to achieve consolidation and to become more efficient. The availability of finance information and the spread of electronic banking allows clients to compare offers of different finance institutions regardless of their location and investment style.’ (Bianchi, 2007, p.270) Also, Islamic counties experience the increase of the clients that do not have a direct relation to the Islamic traditions (such as overseas workers). They accept to receive the finance services that comply with the international standards.

The adoption of the IFRS in addition to the AAOIFI by Islamic Financial Institutions is a complex task. It is also a desirable policy for the Islamic finance system, because it is an inevitable part of the global finance system. It is a bridge from the Islamic world into Western civilization.

The standardization of accounting principles by Islamic Financial Institutions is necessary, but it has several disadvantages for Finance Institutions, and the high cost of IFRS adoption is among them.

Obviously there are also many benefits provided by the adoption of IFRS. For example, banks will receive the opportunity to obtain profit, which is not allowed according to the Islamic law, but which is possible in accordance with the contract that is concluded under the international law. (Bianchi, 2007, p.270)

The standardization of accounting principles by Islamic Financial Institutions will require learning two sets of accounting standards. For generations of finance professionals in Islamic countries, the AAOIFI has been the basis for training, education and examinations of accountants, in schools and in practice’. (Bianchi, 2007, p.270) IFRS is barely known and rarely taught.’ (Bianchi, 2007, p.270) Therefore, such systems as the accounting training, education and examination will need a serious revision.

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