2. Islamic financial reporting in Malaysia

History of Islamic financial reporting in Malaysia

The Malaysian Financial Reporting Act 1997 was enacted in 1997 to establish the Financial Reporting Foundation (MAREF) and Malaysian Accounting Standards Board (MASB). The Act empowers MASB to determine and issue financial reporting standards for public companies including financial institutions for the preparation and presentation of financial statements to be submitted to the respective authority such as Securities Commission of Malaysia, Companies Commission of Malaysia and Bank Negara Malaysia.

MASB requires ‘an entity other than and private entity’ to apply Malaysian Financial Reporting Standards (MFRS) for annual periods beginning on or after 1 January 2012, with the exception of entities that are permitted in the alternative to apply an earlier framework Compliance with MFRS constitutes compliance with IFRS because Malaysia has converged with IFRS.

Bank Negara Malaysia (BNM) circular, Financial Reporting for Islamic Banking Institutions issued on 5 February 2016, require a licensed person to comply with MFRS. As stated in paragraph 8.1 of the circular:

…a licensed person shall ensure that financial statements are prepared in accordance with the MFRS… and shall disclose a statement to that effect in the financial statements.

Islamic Banking Act 1983 only requires IFI to prepare and submit the copies of audited balance sheet (SOFP) and profit and loss account (SOPL) to Central Bank. However, Section 72 of the Islamic Financial Services Act 2013 states that financial statements have the same meaning as set out in the approved accounting standards issued or approved by the Malaysian Accounting standards Board under the Financial Reporting Act 1997 that include SOFP, SOPL, SOCIE, SOCF and notes to financial statement.

AAOIFI conformity all over the world

There is a need for setting up a common standard for the accounting function in Islamic banks. And AAOIFI had taken charge to come out with standards for accounting as well as auditing of IFI. The standards set out by AAOIFI have been adopted by many countries while the others are using as guidlelines in measurement and recognition of transaction and events as well as for preparation and presentation of financial statements.

As mentioned earlier in the introduction section, AAOIFI accounting standards have been made part of mandatory regulatory requirement in many countries such as Bahrain and Jordan and in other countries including Brunei and Malaysia, AAOIFI accounting standards have been used voluntarily as basis of internal guidelines.

Sarea and Hanefah (2013) found that Bahrain IFIs are 100% conform to accounting standards issued by AAOIFI. Ullah (2013) found that seven Islamic banks in Bangladesh are 44.68% comply with AAOIFI whereas Sakib (2015) found that six banks financial statements in Bangladesh are on average 53.79% conform to the AAOIFI standards. Shatnawi and Al-bataineh (2013) found that Jordan Islamic banks are committed with the disclosure requirement of AAOIFI. Asian Oceanian Standard Setters Group (2015) studied the adoption of AAOIFI accounting standards by IFIs in 31 countries all over the world and found 46% of IFIs asserted compliance with IFRS, 34% comply with local GAAPs, 18% comply with AAOIFI and 2% do not specify the compliance with any standards.