ACCOUNTING FOR IJARAH AND IJARAH MUNTAHIA BITTAMLEEK UNDER AAOIFI’S FAS AND IFR
The purpose of this paper is to explore the accounting treatment of Ijarah and Ijarah Muntahia Bittamleek according to the requirements of AAOIFI FAS 8 (Financial Accounting Standard 8). And IFRS IAS 17 (International Accounting Standard) . The paper also demonstrated the accounting treatment of Ijarah and Ijarah Muntahia Bittamleek according to AAOIFI FAS 8. This paper attempts to highlight the potential Shariah compliance issues that are exposed in the adoption of the IFRS IAS 17 over AAOIFI FAS 8 in Ijarah and Ijarah Muntahia Bittamleek. This study found that there are major differences as to the nature of leasing and Ijarah, and as a result accounting principles that have driven the two standards as well as accounting techniques developed for leasing and Ijarah are significantly different. The paper employs qualitative research method using content and document analysis to analyse data gathered from the literature.
The finding helps to highlight the usefulness of applying and reviewing the requirements of AAOIFI FAS 8 as this may serve as a guideline that reflect the accounting issues on ijarah and Ijarah Muntahia Bittamleek especially on recognition of assets, liabilities, income and expenses; measurement; and disclosure and become a useful tool to meet the various needs of Islamic Financial Institution (IFIs).
In line with Central Bank of Nigeria (CBN) objective of promoting financial inclusion in Nigeria, the CBN issued guidelines for the operation of Non-interest banking in Nigeria. Non-interest banking and finance models are broadly categorized into two: 1. Non-interest banking and finance based on Islamic commercial jurisprudence; 2. Non-interest banking and finance based on any other established non-interest principle. With this increasing numbers of non-interest Islamic institution in Nigeria, there is a need for a well-developed accounting system to cater for the Islamic users’ needs relating to financial reporting. Treated as an entity, a business organization needs to fulfil its obligations and abide by the Shariah rules in all its transactions and events. Quality disclosure is a must in upholding social accountability and meeting the fiduciary responsibility to its various stakeholders. While this is the objective of Islamic accounting, the practice of Islamic banks in some aspects resembles that of the conventional system having started from the economic substance.
This paper shall attempt to highlight issues in respect of Ijarah accounting of Islamic banks in meeting both the financial and Shariah related objectives. The discussion are based on comparing and contracting of the AAOIFI6 FAS and IFRS7 IAS. The fundamental differences between IFRS and AAOIFI accounting standards arise from the different objectives of accounting, as seen by the two standard setting bodies. The objective of IFRS Paragraph 12 states:
“The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.”
The objective of AAOIFI, the introduction to that statement says:
“Financial accounting in Islam should be focused on the fair reporting of the entity’s financial position and results of its operations, in a manner that would reveal what is halal (permissible) and haram (forbidden).
Section 6/2 of the standard sets out the objectives of financial reports in six paragraphs of which the first is “6/2(a) Information about the Islamic bank’s compliance with the Islamic Shari’a and its objectives and to establish such compliance; and information establishing the separation of prohibited earnings and expenditures, if any, which occurred, and of the manner in which these were disposed of.” AAOIFI (Accounting and Auditing Organizations of Islamic Financial Institutions) was established in 1991 and published “Financial Accounting Standards FAS”. AAOIFI is responsible for formulation and issuance of international Islamic finance standards.
IFRS (International Financial Reporting Standard) are published by the International Accounting Standards Board (IASB) International Accounting Standard on leasing (IAS) From the objectives can be seen that IFRS focuses on reporting the economic substance of the transactions undertaken while AAOIFI’s FAS primary aim is that the IFI’s accounting should demonstrate its compliance with the Shariah.