| March 19
March 19 The International Accounting Standards
Board (IASB) will consult with banks across the Middle East and
Asia on how to bridge differences between accounting practices
in Islamic and conventional finance, as a push to harmonise
methods gains pace.
The London-based IASB writes book-keeping rules, known as
International Financial Reporting Standards (IFRS), which are
used in over 100 countries including major centres for Islamic
finance such as Malaysia and Saudi Arabia.
Because the standards focus on conventional finance, there
are differences of opinion on how they should be applied to
Islamic banking, in which interest payments and pure monetary
speculation are banned.
To tackle these discrepancies, the IASB set up an Islamic
finance consultation group, which held its inaugural meeting
last year. It has now identified four areas to study initially,
requesting industry feedback to decide on any future steps it
The consultation doesn't involve a specific course of action
or time frame but it would assist the drafting of
recommendations to the IASB board, Wayne Upton, chairman of the
IFRS interpretations committee and international director of the
IASB, told Reuters.
"For some time now, several people and organisations have
asked that the IASB do something in the area of Islamic finance.
The problem was that it was unclear what 'something' would be."
He added, "As is often the case in standard-setting, one
significant outcome would be to resolve uncertainties that may
exist today in the application of IFRS. Another would be to
bridge the gaps that may exist in terminology and our
understanding of contract forms."
The IASB said last week that it would first look at whether
Islamic banking products would qualify for amortised-cost
classification in its fair value standard, known as IFRS 9. It
asked interested parties to submit their opinions by Aug. 1.
IFRS 9 is problematic for Islamic banks as it deals with
payments of principal and interest.
Future topics include the application of a proposed IFRS
standard for leasing to ijara, which is a common Islamic leasing
structure; whether investment accounts used by Islamic banks are
to be presented on- or off-balance sheet; and treatment of
profit equalisation reserves.
At present, the accounting practices of Islamic banks and
financial firms around the world can vary, depending on the
views of national regulators and their own sharia boards of
Bankers and academics are broadly divided on whether Islamic
finance should have its own accounting standards. Some are keen
to bring the industry under the fold of global regulation, while
others favour bespoke standards that would help differentiate it
from conventional finance.
If a common interpretation of IFRS becomes accepted by
Islamic institutions globally, it could benefit the industry by
simplifying the compliance burden for companies and reducing
unertainty for investors.
The IASB's consultation group includes accounting experts
from Saudi Arabia, Malaysia, Indonesia, Pakistan and the United
Arab Emirates, as well as bodies which shape global guidelines
for Islamic finance: the Malaysia-based Islamic Financial
Services Board, the Bahrain-based General Council for Islamic
Banks and Financial Institutions, and the Jeddah-based Islamic
Research and Training Institute.
It is not clear, however, whether a key Islamic finance body
will join the group: the Bahrain-based Accounting and Auditing
Organisation for Islamic Financial Institutions (AAOIFI). The
IASB's statement listed AAOIFI only as "invitation pending".
"We have invited them to participate and consider them a
constructive and useful source. I understand that they have some
governance and clearance steps that they must complete before
reaching a final decision on their participation. We look
forward to their decision," said Upton.
It might be difficult for IFRS to gain traction without the
participation of AAOIFI, which sets Islamic accounting standards
that are used in whole or in part in many countries. At the same
time, the rise of IFRS could reduce the influence of AAOIFI.
AAOIFI said through a spokesman that it would collaborate
with the IASB, but it did not indicate whether it would actually
join the consultation group.
"AAOIFI looks forward to collaborating with the IASB,
especially in the areas of accounting, to support further
development of (the) international Islamic finance industry."
(Editing by Andrew Torchia)