Standardization of accounting treatment essay

The International Financial Reporting Standards Foundation (IFRS Foundation) is an organization that is responsible for promotion of the IFRSs through the International Accounting Standards Board (IASB) it administrates.

The IASB (International Accounting Standards Board issues the Accounting standards that are known in the world of finance as the International Accounting Standards.

Hawser (2010, p.25) indicates that the process of standardization takes place in the Islamic world too. The major requirement for any accounting standards that will be applied by Islamic institutions is their compliance with Shariah. (Colón, J 2011, p.411)

Hawser (2010, p.25) claims that ”˜Accounting and Auditing Organization for Islamic Financial Institutions and the International Islamic Financial Market play a role in setting  the new  standards.  AAOIFI produced accounting, corporate governance, auditing and shariah standards. ”˜(Hawser, 2010, p.25) But the process of standardization of the accounting principles is complex, because the universal accounting standards may not fit all. One of the factors that may be a barrier to the appliance of the universal accounting standards is the local legislation and traditions.

1. The general effects of standardization on public companies, accounting firms, and small and medium companies

Standardization is a subject of the long-term discussion Unfortunately significant confusion and lack of understanding are still the attributes of standardization. (Leuz and Pfaff, 2004, p. 65) Some possible gains for the companies may be the following: “the lower cost of capital, supports raising capital overseas, easier consolidation, easier cross-border acquisitions and others.” (Leuz and Pfaff, 2004, p. 65)

But one of the groups will obtain an advantage from the process of convergence; this group is investors. The convergence of international accounting standards will help to protect investors.

To sum up, the standardization and the convergence issues still cause many concerns, and especially problematic issue is the timeline of the convergence. Nevertheless, in accordance with the opinion of business community, an orientation and expectation of high-quality provided by reliable accounting standards that are applicable and widely accepted on the global scale is the most significant element in the process of the standardization and the convergence.

1. The AAOIFI standards

The special characteristic of Islamic finance is that ethics intervene into all finance operations: ”˜the AAOIFI was instituted in order for scholars on Shari’a law to create standards of financing that complied with the religious laws.’ (Walsh, 2007, p. 753)

In accordance to Walsh (2007, p. 753), ”˜regulatory standards have been created by the Accounting and Auditing Organization for Islamic Financial Institutions (“AAOIFI”) to standardize the governance of every Islamic business product and service.’

It is known that compliance with the AAOIFI standards is the requirement to any financial institution that aims to serve the Islamic countries’ market. The core concept of the AAOIFI standards is so called ”˜collective personal reasoning’. (Walsh, 2007, p. 753)

It has to be mentioned that these principles actually help operating in Islamic finance industry and doing it in accordance with the regulatory scheme. The compliance with the Shari’a law is an obligatory condition for the banking transactions in Islamic countries, and Walsh (2007, p. 754) claims that the AAOIFI standards create “disclosure and access to information, and increase user confidence and therefore increase investment.”