Navigating reporting diversity: impact on signaling sslamic contract values in banks adopting AAOIFI and IASB standards

Accounting and reporting by Islamic financial institutions under two competing financial reporting regimes —International Accounting Standards Board (IASB/IFRS) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI/FAS)— result in inconsistent information content. This inconsistency stems from the challenges of aligning Shariah principles with conventional accounting practices. This paper explores the complexities of reporting Islamic financial transactions under the AAOIFI and IASB frameworks, focusing on their compatibility with Islamic finance principles. The study examines samples of Islamic banks in Bahrain (applying AAOIFI) and Malaysia (applying IASB). Uniform reporting practices were observed in both countries, leading to a focus on one Islamic bank each for Malaysia and Bahrain as representative cases. A literature review reveals significant gaps in applying 'neutral' accounting standards to religious-based transactions. The paper explores reporting dilemmas faced by Islamic banks, comparing IFRS 9’s application to sale-based, equity-based, and rental-based Islamic financial contracts. It critically examines discrepancies between Shariah principles and conventional standards, emphasizing the need for specialized guidelines to ensure Shariah compliance. The paper identifies conflicting accounting practices between the 'substance over form' principles under the IASB and AAOIFI regimes. AAOIFI has introduced a 'Quasi Equity' category for Unrestricted Investment Accounts (UIAs), shifting their recognition from liabilities under IASB to this new classification, acknowledging UIAs' unique nature. Finally, the paper proposes solutions to align Islamic finance principles with accounting standards. Regulatory bodies, Shariah scholars, and accounting professionals must address these challenges collaboratively. Caution is advised when examining and interpreting the financial statements of Islamic banks globally.