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 harmonize 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 centers 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 could take.
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 scholars.
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.”