An investigation into the extent IFIs display the characteristics of useful decision making within their financial statements'
Date
2021
Authors
Cassim, Shabeer
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Abstract
Locally and abroad, Islamic finance has shown phenomenal growth in recent years. The Global Islamic Finance Report discloses that the global Islamic finance industry stood at US$ 2.293 trillion at the end of December 2016. Islamic finance is not only limited to middle eastern countries but has shown growth in western countries as well, for example the United Kingdom, Luxembourg, Germany and Switzerland. This has led to growth in the number of Islamic Finance Institutions (IFIs). With the growth and reach of Islamic finance, understanding the differences between the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) accounting framework and other commonly used accounting frameworks is crucial. At present there is limited research which explores these differences. This research begins to address this gap in the literature by investigating to what extent IFI’s financial statements reflect the qualitative characteristics of useful information and investigates if there is a significant difference in the application of the qualitative characteristics, as presented in published financial statements, under AAOIFI and International Financial Reporting Standards (IFRS). Shariah (Islamic law) has important cultural differences from most western cultures and countries. Most notable is the prohibition of the concept of ‘interest’. Other prohibitions include trading in pork, intoxicants and games of chance. This may have significant effects on how financial instruments are dealt with compared to IFRS.
The Accounting and Auditing Organisation for Islamic Financial Institutions was established to maintain and promote Shariah standards for IFIs. Some IFIs apply accounting standards issued by AAOIFI, however, the current practice is that many IFIs apply IFRS. The purpose of financial reporting is to provide useful financial information which will aid users in decision making. IFIs rely on strong public confidence as stakeholders expect the institute to act in compliance with Shariah principles and, as a result reporting transparently on financial transactions is essential. The purpose of this research is to assess the qualitative characteristics of useful financial information in the financial statements produced by IFIs and to assess if there is a significant difference in the application of the qualitative characteristics between IFIs which use AAOIFI accounting standards and those which use IFRS. This research employed a quantitative approach and used a 21-item index against which the qualitative characteristics of IFI’s financial statements were scored. This research analysed the financial statements of 83 IFIs, 30 of which produced financial statements using accounting standards issued by the AAOIFI and 53 IFIs which use IFRS.
The main finding of this study is that financial statements issued by IFI’s adequately display the characteristics of useful financial information. The results further indicate there is no significant difference in the score of IFIs which apply IFRS and IFIs which apply AAOIFI in respect of their application of the qualitative characteristics
Description
A research report submitted to the School of Accountancy, Faculty of Commerce, Law and Management at the University of the Witwatersrand, in fulfilment of the requirement for the degree of Master of Commerce in Accounting, 2021
Keywords
UCTD, Islamic finance, Islamic financial institution, AAOIFI, Decision-useful, Financial reporting quality