As the Islamic finance industry steadily grows in the global market, measures to ensure transparency are much needed. Transparency in financial reporting is defined as the extent to which financial reports reveal an entity's underlying economics in a way that is readily understandable to those using the financial reports (Barth and Schipper, 2008). Among the benefits of transparency are reduced cost of capital and reduced information risk. It also contributes to a stable market and increased market confidence for investors in the related sector. The measures related to transparency in the Islamic finance industry are to be championed by the regulators and by standard setters at the international level such as the International Accounting Standards Board (IASB), the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Accounting standards boards in the countries that practice Islamic finance should engage with international standard setters and industry practitioners responsible for accounting and reporting of Islamic financial transactions to rationalize the design of accounting standards. For transactions in Islamic financial institutions (IFIs), another dimension of transparency is the disclosure of the relevant contracts that make up the Islamic financial transactions.
This is the second of two ISRA research papers focusing on the issues arising from the application of International Financial Reporting Standards (IFRS) in Islamic financial transactions. Part 1 examined the basic question of whether the key underlying principles of IFRS are acceptable from the Shari'ah perspective. This paper is Part 2 of the research; it aims to study issues that arise when accounting for Islamic financial transactions using IFRS; in particular, covering transactions related to takaful, murabahah and leases. IFRS applicable to takaful transactions are IFRS 4 Insurance Contracts, IAS 27 Separate Financial Statements and IAS 137 Provisions, Contingent Liabilities and Contingent Assets. Accounting for Islamic financial instruments is related to IFRS 7 Financial Instruments: Disclosures, IFRS 9 Financial Instruments and IAS 137 Provisions, Contingent Liabilities and Contingent Assets. Islamic financial instruments that were identified as having issues are murabahah-related transactions, including deposit and investment products. When IFRS are adopted, possible issues arise where such accounting and reporting would not truly reflect the nature of the Shari'ah contracts.