Term paper on The importance of standardization of accounting treatment

Accounting standards vary among countries. Various researchers mention cultural, language, religious, educational, and other differences as the main influencing factors that cause such differences. (McGee & Bandyopadhyay, 2009, p.496)

But in accordance to Pacter (2003, p.84), the global accounting standards world is quickly changes and often well established accounting systems may not fully correspond to the real life requirements of accounting. The standardization of accounting treatment is subject of discussion of the global finance industry, and in addition it is specifically important for the Islamic finance industry that has seen substantial growth and development in the last decade.

Al-Salem (2008, p.124) indicates that ”˜Islamic financing has expanded from being an investment vehicle for individuals in retail banking to a diversified sector in its own right to an extent that covers so-called ‘sovereign’ issues as well as the financing of a variety of infrastructure projects.’ Additionally this author claims that ”˜Islamic financial institutions are active mainly in three areas: Kuwait, the Gulf Region, and International Markets’.(Al-Salem,2008, p.124)

It has to be pointed out that this sector may be defined as diverse according to corporate investors who operate in it. In addition, it is based on Islamic principles. Bianchi (2007, p. 569) adds that the development of the Islamic finance system may be viewed as an expansion of the global financial system. Besides it also helps to re-adapt Shari’ah principles in the social and economic context. It would not be n exaggeration to say that Islamic finance industry serves as a bridge that divides Islamic countries from one another and from other civilizations. It is not surprising that the standardization of accounting principles is so desirable for Islamic Financial Institutions.

This paper aims to research the following issues: the standardization of accounting treatment for Islamic Financial Institutions and the key issues of their adoption of both to adopt both AAOIFI and IFRS standards.

  1. Accounting standardization worldwide

International Accounting Standards Board (IASB) was a creator of the International Financial Reporting Standards. It should be emphasized that the process of increased concentration on IFRS influences the organizational environment in many countries.

What are the reasons of the differences in financial reporting and disclosure regulations? The major reason is that certain countries possess equity markets that are important for the players of the global finance world and therefore outside shareholders depend on the financial information disclosed by companies from these countries. But the credit-based financial systems of other countries do not have such influence over the global finance market and therefore outside shareholders do not require the financial information disclosed by local companies. To increase the speed and the quality of harmonization and standardization of accounting principles worldwide, finance community created the International Accounting Standards Committee (IASC). This organization has managed to make much progress since its creation in 1973. Clearly, one of the results of its successful work is the adoption of International Financial Reporting Standards (IFRS) by the European Union and Australia.

International Financial Reporting Standards (IFRS) are the most common standards, because the majority of countries use or converge them.  In addition, the basis of International Financial Reporting Standards is the accounting principles adopted by the International Accounting Standards Board.

Leave a Reply