Journal of Islamic Accounting and Business Research

The need of accounting standards for Islamic financial institutions: evidence from
AAOIFI
Adel Mohammed Sarea Mustafa Mohd Hanefah
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financial institutions: evidence from AAOIFI", Journal of Islamic Accounting and Business Research, Vol. 4
Iss 1 pp. 64 - 76
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Islamic banks of Bahrain", Journal of Financial Reporting and Accounting, Vol. 11 Iss 2 pp. 131-142 http://
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JIABR
4,1 The need of accounting standards
for Islamic financial institutions:
evidence from AAOIFI
64
Adel Mohammed Sarea
College of Business and Finance, Ahlia University, Kingdom of Bahrain, and
Mustafa Mohd Hanefah
Faculty of Economics and Muamalat,
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Universiti Sains Islam Malaysia (USIM), Malaysia

Abstract
Purpose – The purpose of this paper is to determine the need of Islamic Accounting Standards –
a review of the literature – for Islamic financial institutions (IFIs).
Design/methodology/approach – The basis of the paper was stakeholder theory to analyse the need of
accounting standards and to design the conceptual framework as evidenced from Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI). The evidence reviewed suggests the need for
Islamic accounting standards to fill the gap in accounting practice among Islamic financial institutions.
Findings – The AAOIFI accounting standards serve as a guideline that may reflect the unique
characteristics of IFIs and become a useful tool to meet the various needs of IFIs. Currently, one of the
major challenges facing IFIs lies in the preparation of the financial statements under different
accounting standards and which may lead to problems of comparability, reliability and compliance
level measurement. This has resulted in a heated debate among scholars which has hitherto translated
to the evolving existing literature surrounding the interpretation of the level of compliance with the
Islamic accounting standards. The paper concludes with various recommendations for future research,
the most important of which is the need for future studies on how AAOIFI accounting standards can
be made mandatory in all Muslim countries.
Originality/value – This paper contributes towards a better understanding and acceptability of the
need of Islamic Accounting Standards.
Keywords Islamic accounting, Islamic financial institutions, AAOIFI Standards, Accounting, Islam
Paper type Literature review

1. Introduction
At present, Islamic banks represent the majority of Islamic financial institutions (IFIs),
which are spread locally and internationally across both Muslim and non-Muslim
countries. The emergence of Islamic banking is due to the increasing demand from
Muslims communities worldwide for Shari’ah complied Islamic financial products,
services and the variety of modes of Islamic finance. However, Islamic banking is
evolving and growing at a rapid rate with an impressive record of more than 200 IFIs
operating in 63 Islamic and non-Islamic countries (Maali and Napier, 2010). The past
ten years saw high growth in the number of IFIs around the world that has attracted
Journal of Islamic Accounting and major Western institutions such as Citibank, HSBC, and Deutsche Bank, which operate
Business Research Islamic windows within conventional banks (Maali and Napier, 2010). Furthermore,
Vol. 4 No. 1, 2013
pp. 64-76 given the rate of growth of the IFIs, the continuous sustainability of the development
q Emerald Group Publishing Limited by IFIs in both Islamic and non-Islamic countries needs Islamic accounting standards
1759-0817
DOI 10.1108/17590811311314294 otherwise called accounting and auditing organization for Islamic financial institutions
 (AAOIFI) accounting standards due to the unique characteristics coupled with the Accounting
growing demand of IFIs’ products and services so as to facilitate and enhance the
credibility and reliability of the financial statements and reports.
standards for IFIs
It is argued that the current standards which are based on conventional framework
seem insufficient to guide the IFIs. Currently, the various IFIs apply different
accounting standards in their preparation of their accounts due to the absence of
Islamic accounting standards (Zaini, 2007). The trend towards the AAOIFI standards 65
has become a pressing issue that has generated heated debate among Organization of
Islamic Cooperation countries.

2. Stakeholder theory and Islamic accounting standards

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The identification of a theory is needed to serve as a basis of interpretation of the

factors influencing the need of accounting standards. The definition of a stakeholder is
“any group or individual who can affect or is affected by the achievement of the
organization’s objectives” (Freeman, 1984). The general idea of the stakeholder concept
is about what the organization should be and how it should be conceptualized
(Haarman and Schmid, 2006). The conceptual framework for financial reporting
contains objectives that are aimed at providing meaningful information:
. for creditors and investors to aid in making an informed decisions;
. for the assessment of future cash flows; and
. regarding the enterprises resources (assets) and changes in them, i.e. the users of
financial statements (Lovett, 2002).
The current research, however, chose the stakeholder theory as its main underlying
theory based on the fact that, it considers the overall theory because of its ability to
explain the need of accounting standards as well as to determine the need of users of
financial reporting. As discussed above, the definition of a stakeholder is any group or
individual, one of that are users of financial reporting including shareholders,
investors, employees, customers, and suppliers who can affect or is affected by the
achievement of the organization’s objectives. In line with that, the stakeholder theory
emphasized the need of social responsibility to serve the nations and also to ensure
more transparency and disclosure of financial statements.
The underlying theory in this research is the stakeholder theory based on its ability
and richness in explaining the extent of the need of accounting standards by IFIs.
Moreover, stakeholder theory can also be used to analyse the process of adopting
accounting standards and possesses ability to highlight area for further research
before the theory can either be accepted or dismissed as inappropriate for inquiry into
the nature of the accounting standards setting process (Hussein, 1981).
The importance of increased interest to the need of accounting standards could
reduce the problem of conflict of interest by showing the role of accounting standards
to achieve compatibility between “any group or individual” (Freeman, 1984). Thus, the
need of accounting standards could serve also the relationship between groups and
individuals according to stakeholder theory.

3. International Accounting Standards: evidence from IFRS

This paper combines literature review from conventional accounting standards and
Islamic accounting standards to determine the need of accounting standards and the
 JIABR impact of adopting accounting standards by IFIs. As noticed in the literature review,
4,1 adopting or complying with either International Accounting Standards (IASs) or
Islamic accounting standards may be the best choice for increasing investments;
investor’s confidences as well as assisting in attracting foreign portfolios investors and
local investors. Therefore, many researchers argue that the application of a standards
or harmonized accounting principles would greatly benefit investors, creditors, and
66 other users of financial statements, especially when the financial data being compared
was compiled in a variety of geographical locations.
In international arena, Iwona (2004) found that, adoption of IASs may attract
foreign investments. In line with that, Haverals (2007) indicates that, adoption of the
International Financial Reporting Standards (IFRSs) would increase the attractiveness
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of EU countries as the location of choice for the multinational companies. On the other
hand, Joshi and Ramadhan (2002) found that, size, auditors’ reputation, the percentage
of foreign sales and profitability were the main determinants of the level of compliance
with IASs to be implemented by listed companies in Bahrain. However, lack of
standardization and institutional legitimization of accounting standards may cause
some challenges to adopt accounting standards and to ensuring the need of authority
to be implemented globally. Related to that, Mir and Rahaman (2005) found that,
institutional legitimization is a major factor that drives the decision to adopt the IFRS
as a result of the pressure exerted by key international donors on the Bangladeshi
Government and professional accounting bodies. Furthermore, Al-Shammari et al.
(2008) investigated the extent of compliance with IASs by companies in the Gulf
Co-Operation Council (GCC). In general, the levels of compliance with IAS increased
from 1996 to 2002 for all standards, indicating that the GCC states were collectively
progressing towards achieving greater harmonization with IASs. A possible
explanation of increased level of compliance with IASs is that, they are less costly
and less difficult to be implemented.

4. Islamic accounting standards: between practice and theory

The needs for accounting standards and IFIs are emphasised in the Quran:
[. . .] Never get bored with recording it, however small or large, up to its maturity date, for this
is seen by Allah closer to justice, more supportive to testimony, and more resolving to doubt
[. . .] (al-Baqara: 282) (Tag El-Din, 2004).
In addition, “Those who eat Ribâ (usury) will not stand (on the Day of Resurrection)
except like the standing of a person beaten by Shaitân (Satan) leading him to insanity.”
That is because they say: “Trading is only like Ribâ (usury)”, whereas Allâh has
permitted trading and forbidden Ribâ (al-Baqara: 275).
Based on the above quoted verses of the holy Quran, Allâh has permitted trading
and forbidden Ribâ (usury). For that, Allah sent his Prophet Mohammed (S.A.W) to
teach the Ummah and guide them. Over the years, Islam has gained tremendous
popularity and is currently recognized as the second largest and fastest growing
religion in the world. Islam does not only lead to ritualistic religion confined to
individuals rather, it also involves an integrated way of life that combines politics,
economics, culture, religion and every aspect of human life (Hameed, 2001). Based on
the fact that, Islam is a belief system that unites about 1.2 billion people around the
world which approximately constitutes one-quarter of the global population
 (Masood and Tahir, 2008), it is necessary that, Muslims develop and embrace a unique Accounting
economic system (Islamic Economic System) to meet their needs. In this regard, IFIs standards for IFIs
have been established to fulfill this need by helping the Muslims community to avoid
Ribâ (usury) in their financial engagement and daily financial transactions. One of the
IFIs is Islamic banks. Islamic banks transactions as reflected in the financial reporting
are prepared under a variety of accounting standards which pose a threat to its unique
accounting and reporting system. Thus, Islamic accounting standards will ensure a 67
compatible accounting system. This, therefore, led to the growing aspiration for a
financial statement that has the potential to enhance the credibility of financial
statements that are in accordance with the Shari’ah, and the need to make the Islamic
accounting standards relevant. However, before the implementation of the Islamic
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accounting standards such as AAOIFI by IFIs, it is necessary to ascertain whether

AAOIFI accounting standards are appropriate and suitable for Islamic banks, and
whether the compliance with the AAOIFI accounting standards may disclose more
information to users in order to create confidence among investors and the public to
invest their money in these sectors.
Islamic banks operate mainly in developing countries-for example, the Middle East,
Africa, and South-East Asia. These countries are facing accounting problems in their
practice due to dissimilar accounting standards adopted to prepare financial reporting.
For instance, financial institutions in Jordan, the UAE and Qatar are officially required to
comply with the IASs. Meanwhile, in countries such as Saudi Arabia, the authorities
require compliance with both IAS and local accounting standards. In Malaysia, there are
national accounting standards (MASB) which are based on IAS (Ahmed, 2002). Beginning
January 2012, Malaysian accounting standards are in full congruence with the IFRSs.
Therefore, researchers in the area of financial reporting for IFIs have conducted a
considerable number of studies to investigate the Islamic banks’ compliance with
accounting standards. Until recently, one of the main problems facing Islamic banking
includes a lack of standardized accounting and auditing standards (Pomeranz, 1997).
However, conventional accounting is inappropriate for Muslim users and Islamic
organizations according to Hameed (2001), and it is inappropriate to impose unmodified
Western accounting practices on developing countries (Karim and Tomkins, 1987). In
addition, IASs based on such techniques would create difficulties for Muslims around
the world. Therefore, it is imperative for the Muslim accountants to develop accounting
standards which are specially adapted to Islamic needs, and for Muslim countries
(Shadia, 2007).
Basically, there is a lack of evidence regarding the adoption of the Islamic accounting
standards and analysis of Islamic banking principles under national Shari’ah advisory
council, central bank roles, political system and economic structure. Moreover, the
major problem is in the adoption of accounting standards and disclosure in IFIs that is still
based on the conventional accounting philosophy (Harahap, 2003). It is argued that
the adoption of accounting standards by Islamic banks will help to enhance their
credibility and fuel their growth worldwide (Ariss and Sarieddine, 2007). However, the
rapid development of IFIs requires standards for disclosing information, satisfying not
only the general standards of disclosure but also standards relating to Islamic values
(Harahap, 2003).
The actual practice and the level of implementation of the Islamic accounting
standards such as AAOIFI requirements among Islamic banks are currently unknown
 JIABR and needs to be investigated. Based on the fact that, these requirements are voluntary in
4,1 some countries, as well as due to the absence of authorities to implement Islamic
accounting standards, IFIs are currently applying different accounting standards in
their financial reporting. Thus, diversities exist in terms of their class structure, political
systems, legal systems, financial systems, educational systems, and the very nature of
conducting business and business ownership (Choi and Meek, 2005). Furthermore, the
68 problem may be due to lack of representative of the diverse environment factors as a
result of adopting or complying with different accounting standards by Islamic banks.
These differences among countries would dictate different accounting practices that
reflect the environmental factors of each country. A single harmonized standard of
accounting practices would be inappropriate and not representative of all the varied
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environmental factors exhibited in global markets (Lovett, 2002). However, accounting

standards are used to generate comparable and reliable accounting information to help
investors, creditors and other users to make investment decisions. These standards
reflect the culture, history, and other characteristics of accounting problems facing those
countries (Abongwa, 2006).
Due to the current different regulatory requirements and legislations, the relevance
and comparability of financial statements are the foundations upon which accounting
standards are predicated. Lovett (2002) documented that, with financial statements
prepared under different accounting standards a problem may exist in:
.
comparability of financial statements prepared globally; and
.
reliability and creditability.

The Accounting Standards Steering Committee (ASSC) was a self-regulatory private

sector body, and ASSC became the Accounting Standards Committee in 1975 in the UK
(Whittington, 1989). Similarly, the AAOIFI Committee is a self-regulatory private body.
Both ASSC and AAOIFI brought in leading accountancy bodies to prepare and develop
accounting standards relating to recognition, measurements and disclosure. Furthermore,
ASSC and AAOIFI are professional bodies sponsored by charted institutions and are
non-profit corporate and independent organizations. The AAOIFI is supported by
institutional members (200 members from 45 countries) including central banks, IFIs, and
other participants from the international Islamic banking and finance industry, worldwide
(AAOIFI, 2010a, b). Similarly, ASSC is also an independent body sponsored by some
chartered institutions (the Irish and Scottish institutes) (Whittington, 1989).
By using the same approach of Solomons Reports 1989 to address this issue, the
AAOIFI’s current problem is lack of authority. Similarly, the main problem to impose
accounting standards in the UK is lack of authority as well as ASSC failure to avoid
controversy by accommodating the needs of pressure groups (Whittington, 1989). Similar
problem is being experienced by AAOIFI which does not have authority to impose Islamic
accounting standards globally. This is due to differences among member countries to
adopt AAOIFI standards in their respective countries.
However, regarding comparability, reliability, and creditability of financial
reporting globally or locally, Callao and Láinez (2007) pointed out that, local
comparability is negatively affected if both the IFRS and local accounting standards
are applied in the same country at the same time. In a related study, Mutter (1993)
stated that, it can be argued that the adoption of IASs would benefit many users of
accounting information, who demand comparable and reliable information. In addition,
 Haverty (2006) found that, lack of comparability is mainly caused largely by the Accounting
revaluations of property, plant and equipment (IAS 16) permitted under IFRS, but not standards for IFIs
permitted under US GAAP.
Global accounting standards are perceived by a segment of the financial community
as the solution to this problem, while other members of the community adhere to the
philosophy of maintaining individual, national accounting standards (Lovett, 2002).
In the adoption process of the accounting standards, influences that affect the rate of 69
adoption are identified. These influences cause changes in the attitudes of participants
in a social system towards the adoption of accounting standards. The influences
and their effect on the rate of adoption are what need to be studied in order to interpret
the association of the variables influencing the adoption of accounting standards
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(Lovett, 2002).
Moreover, diversity in IFIs practices means that, there are practices that have not
been covered by Islamic accounting standards (AAOIFI) or any accounting standards
that are in line with Shari’ah principles. Therefore, developing unique accounting and
auditing standards for the dissemination of such information about IFIs becomes
a necessity (Tag El-Din, 2004). Islamic banks worldwide prepare their financial
statements using variety of accounting standards either IASs or local accounting
standards, the problem may exist in the practices and the level of understanding among
accountants and the level of compliance of Islamic banks global (KPMG and ACCA,
2010, Report). Thus, the need for Islamic accounting standards may possibly be the
right way to resolve these issues. In this regard, there have been arguments in previous
studies that, because of the unique transactions of Islamic banks, conventional
accounting rules such as the IFRSs are not compatible to Islamic banks (Maali and
Napier, 2010). This is because, in the IFIs, depositors’ funds are not guaranteed, and
customer deposits cannot be reported as liabilities in the balance sheets of Islamic banks.
Recently, however many Islamic banks have been adopting the accounting standards
set by AAOIFI (Maali and Napier, 2010). Therefore, understanding factors affecting the
levels of compliance with the Islamic accounting standards (AAOIFI) need to be
investigated in the future studies.
Furthermore, the acceptability and understanding of the role of the Islamic accounting
standards (AAOIFI) can be of high significance for policy implications, regulators,
and standard setters. Currently, the evolving literatures surrounding the interpretation of
the levels of compliance with the accounting standards for IFIs generated a heated debate
among the researchers. Thus, this paper aims to provide answers to the current debate.
A clear understanding and acceptability have the potential to lead to more compliance
with Islamic accounting standards such as AAOIFI. Therefore, it is uncertain to determine
whether the Islamic banks would switch to the AAOIFI standards or adopt a combination
of both of the AAOIFI and local standards. It is therefore necessary to ask the
following question: do we need Islamic accounting standards?

5. The need of Islamic accounting standards

The AAOIFI, a private standard setting body, was established by the Islamic banks
and other interested parties to prepare and promulgate accounting, auditing and
governance standards based on the Shari’ah precepts for IFIs (Karim, 2001).
The AAOIFI organizations has been recognized and mandated to develop accounting,
auditing, governance and ethics standards that are in line with Shari’ah standards in
 JIABR order to promote comparable and reliable accounting information. The formulation and
4,1 adoption of AAOIFI standards in any country is intended to increase foreign investment
as well as investor’s confidence. These standards are set up to produce financial
statements that are transparent in their preparation and easily interpretable by users
(Karim, 2001).
AAOIFI had tended to start with objectives established in contemporary accounting
70 thought, test these objectives against Islamic Shari’ah, and accept those that are
consistent with Shari’ah and reject those objectives that are not consistent with
Shari’ah (Maurer, 2010).
The objectives of the AAOIFI organization is to prepare and develop accounting,
auditing, governance and ethical standards relating to the activities of IFIs.
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According to AAOIFI (2008) the objective of financial accounting for Islamic banks
and IFIs are as follows:
.
To determine the rights and obligations of all interested parties, including those
rights and obligations resulting from incomplete transactions and other events,
in accordance with the principles of Islamic Shari’ah and its concepts of fairness,
charity, and compliance with Islamic business values.
.
To contribute to the safeguarding of the Islamic bank’s assets, its rights and the
rights of others in an adequate manner.
.
To contribute to the enhancement of the managerial and productive capabilities
of the Islamic bank and encourage compliance with its established goals and
policies and, above all, compliance with Islamic Shari’ah in all transactions and
events.
. To provide, through financial reports, useful information to the users of these
reports, to enable them to make legitimate decisions in their dealings with
Islamic banks.

In reference to the above objectives, this research attempts to contribute to the current
framework and serve as a guide for IFIs regarding interest free transactions through
determining the levels of compliance with the AAOIFI accounting standards by
Islamic banks.

5.1 AAOIFI structure

The AAOIFI prepares and issues accounting, auditing, and corporate governance
standards, as well as ethics and Shari’ah standards, for IFIs. Currently, AAOIFI has
published 85 standards that comprises of 26 accounting standards, five auditing
standards, seven governance standards, two ethics standards, and 45 Shari’ah
standards (AAOIFI, 2010a, b).
AAOIFI structure consists of General Assembly, Board of Trustees, Accounting
and Auditing Standards Board, Secretariat General, and Shari’ah Board. However,
AAOIFI develops alternative Islamic standards when:
.
The equivalent IFRS cannot be adopted in whole by the IFIs, e.g. Ijarah
standard vs IAS 17.
.
The IASB has no IFRS elements that cover the specific Islamic banking
and finance practices, e.g. Mudarabah, Musharaka, Salam, and Istisna
(Hameed, 2009).
 The AAOIFI financial accounting standards (FASs) consist of 26 standards (AAOIFI, Accounting
2010a, b), and these standards are expected to be applied by the IFIs. The first eight standards for IFIs
standards deals with disclosure requirements and the rest deals with recognition,
mesurements and disclosure issues. In addition, AAOIFI has issued five auditing
standards to be adopted by IFIs which comprises of objectives and principles of
auditing, the auditor’s report, terms of audit engagement, testing for compliance with
Shari’ah rules and principles by an external auditor and the auditor’s responsibility to 71
consider fraud as well as error in an audit of financial statements. On the other hand,
governance standards which comprises of seven standards discuss a number of issues
related to Shari’ah Supervisory Board (SSB), Shari’ah Review, Independence of SSB,
Governance Committee for IFIs, and Corporate Social Responsibility. Code of ethics for
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accountants and auditors of IFIs and Code of ethics for employees of IFIs are discussed
by AAOIFI Ethics standards. AAOIFI also has issued 45 Shari’ah standards to be
implemented by IFIs globally.

6. Implementation of the Islamic accounting standards: voluntary or

mandatory?
The distinction between voluntary and mandatory accounting standards may often
become unclear. However, to clarify any confusion to implement Islamic accounting
standards, we need to figure out the need for adopting specific accounting standards
by the IFIs. According to Mirza and Nabil (1999, p. 83), there is a need for developing a
set of standards for Islamic accounting and reporting:
The need for accounting standards is not very different from the need for any other kind of
standards, whether it is standards for weights and measures, or standards for clothing sizes,
grades of beef, or baseball statistics.
To discuss the need for adopting accounting standards, we should determine whether
Islamic accounting standards should be made voluntary or mandatory.
To date, few studies have been conducted in this area to discuss the need for adopting
Islamic accounting standards. For instance, Ismail and Abdul (2001), Harahap (2003),
Abdul Rahim (2003), Hameed et al. (2006), Che Pa (2006), Zaini (2007), Nadzri (2006),
Hamat (2009), and Vinnicombe (2010), have examined the understanding, acceptability
and the levels of compliance with accounting standards for IFIs.
The first study in this area was conducted by Ismail and Abdul (2001) whom
theoretically examined the extent to which IFIs adhere to the AAOIFI standards
and IAS standards. Based on the fact that, AAOIFI has no authority to impose its
standards to be adopted by IFIs, its standards therefore remain voluntary in some
countries such as Malaysia. Central Bank of Malaysia (BNM) has no objection to
the adoption of the AAOIFI standards but not in contradiction to the national
requirements. Basically, there are no specific requirements for the financial statements
to show movement of Zakah as required by the AAOIFI Zakah FAS 9 standard. FAS 9
for Zakah allows net assets method or net investment method. On the other hand, in
Malaysia according to Hamat (2009), there are two types of business Zakat accounting
methods which are commonly practiced, namely, the adjusted working capital method
and the adjusted growth capital method in the collection of Zakah by the authorities.
For the disclosure of financial statements Nadzri (2006) concluded that, the extents
of disclosure by the IFIs are much lower than the AAOIFI requirements. The findings
 JIABR also revealed that, those who adopt AAOIFI accounting standards do provide more
4,1 disclosure when compared to the non-adopters. However, the mean result is relatively
low to suggest full compliance with the AAOIFI. For example, among the 25 IFIs
examined from 12 different countries, the findings indicate that ten IFIs adopts the
AAOIFI accounting standards. The ten IFIs are from Bahrain, Sudan, Palestine,
Bangladesh, and Qatar. As for financial reporting, Vinnicombe (2010) has argued
72 the extent to which IFIs comply with the accounting and governance standards issued
by the AAOIFI in their financial reporting. The sampled banks were selected from
the Kingdom of Bahrain. The compliance for the purpose of this study can be defined
as the degree to which IFIs comply with the multitude of issues in the FASs issued by
AAOIFI. However, the findings of the study indicate high level of compliance with
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respect to the governance standards. In contrast, compliance with the AAOIFI’s

requirements regarding the Zakah and the Mudarabah contract is relatively low.
In addition, a higher number of compliance items are associated with retail as opposed
to wholesale banks. However, it should be noted that the sample of the retail banks are
more homogeneous and consistent over time compared to those of the wholesale banks.
Thus, differences in the level of compliance are generally consistent with national
enforcement to adopt IASs if not conflicting with local standards. Furthermore, to
justify the reasons for such low level of adherence and barriers to standards
application among the Muslim nations is that, the AAOIFI does not have full power to
impose its standards and to make it mandatory. Also certain countries like Malaysia
have its own standards like IFSB, which is a direct competitor to AAOIFI.
Hameed et al. (2006) argued that SSB plays a very important role in ensuring the
Shari’ah compliance of the Islamic banks. SSB in Islamic banks must be disclosed
as part of the requirements. The authors chose two banks; Bank Islam Malaysia
Berhad (BIMB) and Bahrain Islamic Bank (BIB) as case studies. The selections of
these two banks are based on the argument that, they are established in two different
countries where the Islamic banking and finance has been immensely developed. The
researchers calculated the number of the principles the banks followed according to
the AAOIFI standards compared to the total accounting principles applied. In this
regard, BIMB’s compliance rate was only 15 percent meanwhile BIB was 61 percent.
Thus, the Islamic banks of Bahrain comply more with the AAOIFI standards
compared to BIMB.
With regard to Islamic bonds, Abdul Rahim (2003) investigated the classification,
recognition, measurement, presentation, and disclosure of Sukuk (Islamic bonds) based
on the standards required by AAOIFI. Considering the function of the accounting
system to provide the information, the introduction of AAOIFI standards aims to
enhance the transparency and comparability of the Islamic banks’ financial statements
and provides a descriptive analysis as stipulated in the AAOIFI FAS 17 regarding
investment. The findings of the study indicate that, IFIs are different from its
conventional institutions counterpart, and therefore need an accounting standard that
reflects its operation in regard to Islamic bonds computations, classification,
recognition, measurement, and disclosure.
In a related study, Che Pa (2006) examined the levels of understanding of the
Sukuk (Islamic bonds) and the acceptability of AAOIFI FAS 17-investment in Sukuk
products among bank managers in Malaysia. The results of the study indicated
that, Malaysian bank managers who are involved directly in the investment in
 Islamic bonds have relatively moderate level of understanding of AAOIFI FAS 17. Accounting
It was also found that, those who have acquired significant knowledge in Islamic standards for IFIs
banking and finance have a better understanding of Islamic bonds. On the other
hand, the AAOIFI FAS 17 is well accepted by the Malaysians bank managers and
may be considered applicable in Malaysia even though they have not referred to
the AAOIFI standards. Zaini (2007) also examined the levels of understanding and
acceptability of AAOIFI FAS 17 investment in Islamic bonds and the relationship 73
between the understanding of Islamic bonds and the acceptability of the AAOIFI
FAS 17. The results indicated that, the accounting academics in Malaysia have
moderate levels of understanding about Islamic bonds. The AAOIFI FAS 17 is highly
acceptable by the respondents despite the fact that, the implementation of the
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AAOIFI standards as well as the AAOIFI FAS 17 is not mandatory in Malaysia.

Rather, it is accepted as a guideline that may reflect the unique characteristics of
Islamic financial instruments.
Last but not least, based on a study by Harahap (2003), it was found that Bank
Muamalat Indonesia (BMI) is relatively more compliant with the AAOIFI accounting
standards and can be used as a benchmark for IFIs when preparing their annual
reports. The reason is that, BMI annual report places more emphasis on local
regulation and in particular, those decreed by Indonesia’s central bank.

7. Conclusion
The adoption or compliance with the AAOIFI accounting standards and IFRS has
become the focus among IFIs. The objectives of the AAOIFI accounting standards are
to prepare and develop accounting, auditing, governance, ethical, and Shari’ah
standards relating to the activities of IFIs.
Based on the stakeholder theory, this paper discussed the importance of the AAOIFI
accounting standards for IFIs globally.
The AAOIFI accounting standards for IFIs that are in accordance with the Shari’ah
requirements are the best choice for increasing foreign investments and investor’s
confidence among Muslim societies and economies.
AAOIFI through its global network has also persuaded regulatory authorities to
adopt its standards, but until now AAOIFI has not been fully successful. It does not
have the power to enforce its standards on IFIs globally. It is strongly recommended
that Muslim countries should give full support to AAOIFI standards by adopting and
making them mandatory for all IFIs.

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76 Corresponding author
Adel Mohammed Sarea can be contacted at: Adelsarea@yahoo.com
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