The vision of establishing a common set of accounting standards to be used throughout the world has today received the public support of many international organisations, including the G20 countries, the International Monetary Fund (IMF), the World Bank, the Financial Stability Board, the International Organisation of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision. The International Financial Reporting Standards (IFRS), previously known as International Accounting Standards (IAS), represent the set of global accounting standards that are currently being used in more than 120 countries worldwide. IFRS are principles-based standards as they establish broad rules that apply to transactions and events — instead of setting bright-line thresholds or limits—thus allowing for judgement to prevail when applying the standards to a company’s financials.
In relation to Islamic financial transactions, the key challenge is agreement on a single set of high-quality accounting and reporting standards that is acceptable to all the relevant players in the global Islamic finance industry. Currently there are two main contenders for the role:
(1) IFRS issued by IASB; the MASB in Malaysia subscribes to this approach and has issued the IFRS-compliant MFRS in November 2011, which is equally applicable to IFIs as from January 2012; or
(2) Financial Accounting Standards (FAS) issued by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).
As the move towards convergence to IFRS is increasing the world over, inevitably the question becomes more pertinent as to whether the accounting for Islamic financial transactions should also converge towards IFRS adoption. This research paper attempts to shed light on a basic issue: whether the key underlying principles of IFRS are acceptable from the Shari'ah perspective. This paper accordingly aims to undertake an appraisal of the key underlying accounting principles of IFRS based on the classical fiqh literature and Shari'ah resolutions from local and international organisations. Particularly, four IFRS principles are examined that serve as important guides to preparers of accounts and have a significant impact on Islamic financial transactions: substance over form, the time value of money, fair value measurement, and recognition based on probability.