IFRS or AAOIFI? On January 1, 2016, private companies in Malaysia officially adopted the International Financial Reporting Standards (IFRS) to streamline cross-border financial reporting. For the Islamic finance industry, Malaysia’s accounting experts say the nation is sticking with IFRS instead of standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).
“There are really only two games in town,” Faiz Azmi, chair of the Islamic Finance Consultative Group of the International Accounting Standards Board (IASB) told Salaam Gateway. The IASB is responsible for the development and publication of IFRS standards.
“There is the U.S. GAAP, but the whole of Europe is on IFRS, so is China. Most of Asia is still substantially IFRS. That does seem to be the de facto world standard,” said Azmi.
IFRS was started in the 1970s by a group of professional accounting bodies to push for better comparability and transparency in financial reporting, and it addresses the dissimilarities in these standards among different jurisdictions that may result in cross-border operational complexity and higher costs for investors. Some of its defining aspects include an emphasis on revealing the true economic values of all transactions, and adherence to characteristics of comparability, verifiability, timeliness and understandability. Today, IFRS has been adopted by 126 countries either in part or in full.
Mohamed Raslan, chairman of the Malaysian Accounting Standards Board (MASB), a government-sanctioned body comprising a handful of recognized professional accounting bodies, believes IFRS acts as an aid to key players. “IFRS as the international financial reporting language could accommodate business and capital market growth, enabling investors and market participants to make informed economic decisions,” he told Salaam Gateway.
Raslan explained that Malaysia officially moved to full convergence with IFRS standards in 2012 in an effort to initiate a broad strategic direction to align its accounting standards to those issued by the IASB.
Malaysia’s government appointed the MASB to agree on its own accounting standard, which is known as the ‘Malaysian Financial Reporting Standards (MFRS) Framework’. The MFRS is largely based on the IFRS model, with certain provisions for the local situation.
Azmi explained that more than a decade ago, 40-page booklets were printed to explain the gap between Malaysia’s standards and IFRS, a metaphor for the operational complexities of arbitrating between two different standards. “IFRS is one of those things where there’s no empirical data to prove [its success],” he added.
Today, however, the convergence of the two standards has led to lower operational costs and increased synergies between overseas subsidiaries and product sales across multiple jurisdictions. Costs are pushed down as there is no need for adjustments to be made to group accounts when consolidating accounts of subsidiaries operating in different jurisdictions. The Japanese Financial Services Boardsurveyed 65 companies in 2015, and found that the majority of the corporations found “contributions to business management” a huge value add of IFRS adoption, which allows for the simplification and consolidation of accounts.
“Now we don’t even bother creating that book because there is no difference,” said Azmi.
In July this year MIA told local newspaper the New Straits Times (NST) that Malaysia could be the first nation to incorporate IFRS into the country’s Islamic finance regulations. Azmi, who is also the president of the MIA, said the institute was working on a book on how to implement IFRS standards in Islamic finance.
He added that IFRS is reassuring for customers and shareholders who want to make comparisons between Islamic and conventional products, whether for investment purposes or to conduct due diligence.
Additionally, the adoption of IFRS could help a country drive up foreign direct investment (FDI) by improving international comparability and compliance. Studies have shown that IFRS adoption has led to increased FDI flows, particularly in developing countries, as investors are more likely to put money into a company whose finances they can more easily understand, and compare with other businesses.
“The use of a set of globally accepted framework means the Islamic financial institutions would be able to assert that the same high standard and best practices are adopted in the preparation of their financial statements,” said MASB’s Raslan. “Investor confidence would improve and this will in turn encourage greater investment and cross-border opportunities.”
Source : Salaam Gateway
