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Disclosure on Investment Account by Islamic Financial Institutions (IFIS) in Malaysia: Gaps Between Malaysia Standards And AAOIFI Standards

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This chapter is written by Muhammad Iqmal Hisham Kamaruddin, Mustafa Mohd Hanefah and Zurina Shafii from Universiti Sains Islam Malaysia (USIM). The chapter aims to assess the gaps that exist between the requirements outlined by Malaysia accounting
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  Chapter Six DISCLOSURE ON INVESTMENT ACCOUNT BY ISLAMIC FINANCIAL INSTITUTIONS (IFIS) IN MALAYSIA: GAPS BETWEEN MALAYSIA STANDARDS AND AAOIFI STANDARDS Muhammad Iqmal Hisham KamaruddinMustafa Mohd Hanefah Zurina Shafi Universiti Sains Islam Malaysia (USIM) INTRODUCTION The emergence of accounting reporting standards begun in 1973 when professional accountancy bodies in nine countries initiated the International Accounting Standards Committee (IASC) with the mission to formulate and publish in the public interest, basic standards to be observed in the presentation of audited accounts and nancial statements (Pacter, 2014). The IASC further launched a set of the International Accounting Standards (IAS) so as to promote the acceptance of worldwide accounting standards. Over time, IASC have been restructured into the full-time, better nanced International Accounting Standards Board (IASB), put under the oversight of a new International Financial Reporting Standards (IFRS) Foundation in 2001, and having issued the rst standard – IFRS 1 in 2003. Despite this fact, Malaysia only ofcially announced to adopt the IFRS standards in 2008 that were formally adopted in 2012 (IFRS, 2017).Since the issuance of the IFRS standards, various professional accountancy bodies across the world are promoting the adoption of these standards in order to ensure nancial stability and economic efciency in an increasingly globalized world. Normally, the motivation for adopting international accounting standards is to Layout Syariah Governance.indd 14605/08/2019 4:02 PM   Disclosure On Investment Account By Islamic Financial Institutions (IFIS) In  Malaysia: Gaps Between Malaysia Standards And Aaoif Standards 147 improve the quality of nancial reporting in order to increase the level of user condence in nancial statements when making decisions and to improve the comparability of statements between different organisations and countries (Sarea & Hanefah, 2013; Jeanjean & Herve, 2008; Callao et al., 2007). However, the adoption still does not totally eliminate existing variations of national accounting standards and practices in different countries around the world. The harmonization between accounting standards can be considered to have happened in a short period of time (Camfferman & Zeff, 2006). This started with organisational compliance practices having different Generally Accepted Accounting Principles (GAAP) across countries in 1990s, leading to the acceptance of the IFRS in 2000s (Carmona & Trombetta, 2008). A number of factors have driven the acceptance of a common set of accounting standards such as political integration, economic globalization, social and cultural diversity and different jurisdictions (Clements et al., 2010; Ball, 2006). In the case of Islamic organisations, variations in accounting standards for Islamic nancial institutions (IFIs) occur across countries. This happens as the accounting requirements for IFIs operations arising from Shariah  compliance cannot be completely met by the international accounting standards such as IFRS (Ibrahim, 2009; Archer & Karim, 2007; Vinnicombe & Park, 2007). Some Shariah-  based contractual requirements are not covered in the international standards, while some conditions outlined in the IFRS are irrelevant for IFIs. Hence, recognising that there was no uniformity and comparability for transparent nancial statements in the IFI industry, the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) was established as a standard-setting  body to issue accounting standards for Islamic nancial institutions in accordance with Shariah (Archer & Karim, 2007).However, there arised an issue of comparability between nancial statements as IFIs who adopted AAOIFI standards would have different disclosure as compared to the IFRS standards as some of the accounting guidelines of AAOIFI diverge from IFRS. This will lead to it being unrecognized by the stakeholders as the practice is inconsistent with IFRS and these may be interpreted as non-compliance with international standards (Ibrahim, 2009; El Qorchi, 2005). In Layout Syariah Governance.indd 14705/08/2019 4:02 PM  Shariah Governance And Assurance In Islamic Financial Sectors 148 this case, the IFIs are stuck between complying with the IFRS as a worldwide-accepted practice and disclosing Shariah  compliance as  part of its accountability and transparency practices.One way of dealing with this issue is for the IFIs to subjectively choose from the IFRS standards those that match the provisions of Shariah- compliant contracts (Archer and Karim, 2007). However, as not all the accounting requirements arising from Shariah  compliance are covered in the IFRS, certain items will remain either unreported or be reported inadequately. In such cases, IFIs may opt to provide relevant information arising from Shariah  contracts voluntarily. Unfortunately, such voluntary disclosure will lead to unstandardized nancial statements disclosure by IFIs globally (Karim, 2001). Due to this matter, the Malaysian Accounting Standards Board (MASB) and the Central Bank of Malaysia (BNM) have separately released special accounting standards and guidelines for IFIs to overcome this unstandardized nancial statements disclosure. However, this marks the difference between IFIs disclosure practices in Malaysia with other IFIs practices across the world that adopts AAOIFI standards.Given the above reasons, the primary aim of this chapter is to assess the gaps between the requirements by Malaysian accounting standards (MAS) with AAOIFI’s Financial Accounting Standard No.1 (FAS1). Besides that, introduction of the Islamic Financial Services Act 2013 (IFSA 2013) have signicantly changed the presentation of nancial statements especially for disclosure on investment accounts. Therefore, this chapter will focus on examining the compliance of all IFIs in Malaysia with regards to the disclosure on investment accounts, which could be used to explore the extent of disclosure  practices by IFIs in Malaysia to ascertain whether they are beyond MAS requirements and are in line with some other additional features of FAS1. The next section of the chapter briey outlines and discusses the background of IFIs in Malaysia, specically on Islamic banking, the accounting standards by both MASB and BNM along with the accounting standards by AAOIFI. The research methodology section highlights the research methods used in this study while section four is devoted to presenting the results. The nal section offers the conclusion to the study. Layout Syariah Governance.indd 14805/08/2019 4:02 PM   Disclosure On Investment Account By Islamic Financial Institutions (IFIS) In  Malaysia: Gaps Between Malaysia Standards And Aaoif Standards 149LITERATURE REVIEWIslamic Financial Institutions in Malaysia IFI in Malaysia is as old as the creation of the rst formal Islamic  banking institution. The historical development of Islamic banking institutions started after the establishment of Lembaga Tabung Haji (  Hajj  Management Fund Board (HMFB)) in 1962 under the Tabung Haji Act 1995 (Amendment). It is claimed that HMFB was the rst nancial institution in Malaysia that provided savings in accordance with Shariah to Malaysian Muslims who wanted to perform pilgrimage ( hajj ). Those who wanted to perform hajj would set aside savings Mto cover the costs of hajj . These funds were then invested by HMFB in productive sectors of the economy, with the intention of making interest-free returns (Nasser & Muhammed, 2013). Nevertheless, HMFB was not a form of today’s ‘modern IFI’,  but its successful performance eventually led to the establishment Islamic banks (Nasser & Muhammed, 2013). Eventually, a proper Islamic banking institution in Malaysia was initiated with the establishment of Bank Islam Malaysia Berhad (BIMB) in 1983 under the Islamic Banking Act 1983. The pioneering bank started operations with an initial paid up capital of RM80 million. BIMB has since carried out its banking business side-by-side with other commercial banks, while maintaining its main objective of being Shariah compliance (Laldin, 2008). In the effort to strengthen Islamic nancial markets, BNM introduced an interest free banking scheme, which allows conventional banks to provide free interest services in 1993 (Laldin, 2008). Furthermore, BNM also allowed foreign banks to provide Islamic banking services in the Islamic nancial markets in Malaysia. Subsequently, Malaysia has gained a high level of condence in its Islamic nancial market. By implementing a dual banking system, Malaysia has expanded and improved the level of competition in its nancial sector. Therefore, Malaysia has become an attractive nancial intermediary in the eye of foreign banking institutions to operate in high-tech Islamic nancial markets (Nasser & Muhammed, 2013). The Malaysian Islamic nance industry has prospered and is regarded as one of the most developed in the world (Khiyar, 2012; Layout Syariah Governance.indd 14905/08/2019 4:02 PM  Shariah Governance And Assurance In Islamic Financial Sectors 150 Ibrahim, 2009; Khan and Bhatti, 2008). According to the Islamic Finance Country Index (IFCI) by the Global Islamic Finance Report 2016  , Malaysia was ranked number one for the rst time in the history of the index (GIFR, 2016). The report also placed Malaysia at the top of the list in terms of developing a coherent and comprehensive Islamic nancial policy, covering IFSA 2013 and the regulatory frameworks developed by BNM, Securities Commission Malaysia (SC) and Labuan Financial Services Authority (LFSA). In addition, the World Islamic Banking Competitiveness Report 2016   also highlighted a similar fact, where with an estimated value of US$920 billion of total Islamic nance assets in 2015, Malaysia was the second highest in the global Islamic nance industry with 17 percent of the total global Islamic nancial assets and managed to acquire 15.5 percent of the global Islamic nance market share (Ernst Young, 2016). Besides, Malaysia was the world’s biggest  sukuk   market, constituting of 67 percent of global outstanding  sukuk   (CIBAFI et al., 2015). Despite huge achievements by Malaysia in the Islamic nance industry globally, Malaysia’s Islamic banks’ market share contributes only 21.3 percent of the total banks’ market share in Malaysia. To date, there are 16 commercial Islamic banking institutions in the country. These consist of 10 local banks and 6 foreign banks.  Malaysian Accounting Standards (MAS) for Islamic Financial Institutions (IFIs) The Malaysian Accounting Standards Board (MASB) was established in 1997 as an independent standard-setting authority mandated to develop and issue accounting and nancial reporting standards in Malaysia (MASB, 2017). MASB decided to re-position the Malaysian Financial Reporting Standards (MFRS) towards the IFRS in 2008 to ensure the compatibility of nancial reporting with global standards (IFRS Foundation, 2017; Shai & Zakaria, 2013; Shai et al., 2013). MASB completed the convergence process in 2012 where they mandated that all companies were required to use MFRS in their nancial reporting practices (Yeow & Mahzan, 2013). The nal version of MFRS is closely aligned with IFRS, and, to a large extent, is its word-for-word equivalent (World Bank, 2012). Layout Syariah Governance.indd 15005/08/2019 4:02 PM
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