Convergence of international accounting standards on financial instruments for Islamic banks in Malaysia and Bahrain

Abstract

Despite the impressive development of the Islamic banking industry, however it still struggles in reaching international consensus on several vital issues including the aspect of financial reporting. The wave of convergence towards International Financial Reporting Standards (IFRS), the obligation to abide to Shariah principles with its differing interpretations as well as to comply with local regulation have resulted in the diversity and inconsistency of the financial reporting in Islamic banks (IBs). Meanwhile the attempt to utilize Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standards to serve the specific needs of the IBs’ financial reporting has been challenging due to the limited adoption of its accounting standards. Founding on institutional and stakeholder theories and using the case study of the two most recognized Islamic financial hubs, i.e., Malaysia and Bahrain, this study aims to address several issues of IBs’ financial reporting in relation to the IFRS convergence. To achieve this objective, this study performed comparative analysis between the IFRS’ and AAOIFI’s accounting standards on financial instruments, analyzed the adoption of IFRS’ and AAOIFI’s accounting standards by IBs in both countries for the period of 2007-2009, and also conducted a questionnaire survey to the financial statement preparers of IBs in both countries. This study found and confirmed that IFRS and AAOIFI accounting standards are harmonious in certain aspects particularly on some measurement requirements. However, the areas of divergence are also of clear evidence such as on impairment, recognition and disclosure of gain and loss. While this study indicated that AAOIFI accounting standard is of possible adoption, the adoption level is still very limited even in Bahrain where the standards are mandatory. Meanwhile the survey generally identified positive approval towards IFRS convergence but the respondents also demanded specific accounting standards for IBs that can be incorporated to the existing IFRS framework. It is mainly triggered by the needs to enhance the quality and comparability of Islamic financial reporting as well as to fully adhere to Shariah principles. This study implies that more intense collaboration is needed to provide a complete and internationally accepted framework of accounting and reporting for IBs that is tailored to the requirements of IBs and deem fit for national commitment to IFRS convergence.