This document discusses the history and development of Islamic accounting and auditing standards in Malaysia. It provides details on: - The establishment of the first Islamic banks and universities in Malaysia in the 1980s to support Islamic finance. - Key organizations established by the Malaysian government to regulate and develop Islamic economic initiatives and institutions. - The issuance of guidelines by Bank Negara Malaysia on financial reporting for Islamic financial institutions, which introduced additional reporting requirements compared to conventional standards. - The role of the Malaysian Accounting Standards Board in developing the first Islamic financial reporting standard and other exposure drafts to provide accounting guidance for core Islamic finance concepts. - Challenges in standardization due to differences of opinion among

1. ISLAMIC ACCOUNTING AND
AUDITING (IAA)
MALAYSIA EXPERIENCE
PUBLIC AND PRIVATE SECTORS
KAMIL MD IDRIS

2. IAA FOUNDATION
 The objectives of providing the information;
 The type of information is identified;
 How the information is it measured, valued,
recorded and communicated; and
 To whom will the information be communicated
(the users).

3. - conventional accounting - defined to be
the identification, recording, classification,
interpreting and communication of
economic events to permit users to make
informed decisions.
- It can be seen that both accounting
systems set out similar objective of
reporting.
- Not only that, Islamic accounting shares
with their conventional counterparts the
same common process of recognition,
measurement and recording of
transactions and fair presentation of rights
and obligations

4. MALAYSIAN HISTORY OF ISLAMIC TRANSACTIONS
 Islamic banking in Malaysia began in September 1963
when Perbadanan Wang Simpanan Bakal-Bakal Haji
(PWSBH) was established. PWSBH was set up as an
institution for Muslim to save for their Hajj (pilgrimage to
Mecca) expenses. In 1969, PWSBH merged with Pejabat
Urusan Haji to form Lembaga Urusan dan Tabung Haji (now
known as Lembaga Tabung Haji).
 The first Islamic bank in Malaysia was established in 1983.
 To support the future development of Islamic bank
Malaysia also established a university in 23 May 1983,
founded on Islamic principles. Islamic values are inculcated
into all disciplines. The university offers bachelor, master's
degree and PhD courses at its 13 faculties, also known as
kulliyyah. The university is called International Islamic
University Malaysia (IIUM)

5. • In 1993, commercial banks, merchant banks and
finance companies were allowed to offer Islamic
banking products and services under the Islamic
Banking Scheme (IBS). These institutions however, are
required to separate the funds and activities of Islamic
banking transactions from that of the conventional
banking business to ensure that there would not be
any co-mingling of funds.
• Increasing demand of Islamic based activities Malaysia
Government established another Islamic based
university which is called Universiti Sains Islam
Malaysia (USIM) in 1998.
• Positive future development of Islamic based economic
activities lead the Universiti Utara Malaysia to
establish Islamic Business School focusing on
Islamic Management.
MALAYSIAN HISTORY OF ISLAMIC TRANSACTIONS

6. • National Syariah Advisory Council additionally set up at Bank Negara
Malaysia (BNM) advises BNM on the Shariah aspects of the
operations of these institutions, as well as on their products and
services.
• In June 2005, Dow Jones and Company of New York and RHB
Securities of Kuala Lumpur, teamed up to launch a new "Islamic
Malaysia Index" — a collection of 45 stocks representing Malaysian
companies that comply with a variety of Sharia-based criteria. Three
variables (the total debt of an indexed company, its total cash plus
interest-bearing securities and its accounts receivables) must each
be less than 33% of the trailing 12-month average capitalization, for
example.
• In 2006, Bank Negara Malaysia setup International Centre for
Education in Islamic Finance (INCEIF) a dedicated University to
provide skilled and certified personnel for Islamic Finance in
Malaysia. The university was established as part of the Malaysian
Government's initiative to further strengthen the country’s position
as an international Islamic finance centre. It is the only university in
the world that is wholly dedicated to postgraduate study in Islamic
Finance.
MALAYSIAN HISTORY OF ISLAMIC TRANSACTIONS

7.  Minister of Islamic Affair
 JAKIM - Laws and religious administrative matters
 JAWHAR – waqaf , zakat, and Haj
 IKIM – Malaysia Islamic Understanding Institute
 YADIM – Malaysia Islamic Missionary Foundation
 YaPEIM – Malaysia Islamic Economy Development Foundation
– cater for the development of Muslim Entrepreneurs.
 Malaysia Zakat Institutions
 Amanah Ikhtiar Malaysia (AIM) – Malaysia Ikhtiar Trust is
Malaysia's largest Microcredit organization. Since its inception
in 1987, it has disbursed more than RM2.3 billion in loans to
262,000 borrowers. AIM claims to have the world's highest
repayment rate, at 99.2%.
MALAYSIA ISLAMIC ECONOMIC INITIATIVES

8. The differences between the conventional banking
system and IFIs are summarised as follow:
1): 1. Riba free transactions - any kind of interest
is prohibited under Islamic law;
2. Musharaka where every party involved in a
financial transaction shares the associated risks
and profits;
3. Uncertainty is disallowed unless all of the
terms and conditions of the risk are clearly
understood by all parties to a financial
transaction;
WHY ACCOUNTING STANDARDS AFFECTED

9. WHY ACCOUNTING STANDARDS AFFECTED
4. Emphasizing ethical investments where any
investment in immoral activities such as
gambling and liquor production and selling
are prohibited; and
5. There must be tangible, identifiable
underlying assets to back-up each financial
transaction where money is not considered to
be a tangible asset.
As a result of differences in IFIs and their
ultimate goals, most studies agree that there
is a need for a special set of Islamic
accounting standards, tailor-made to these
IFIs. The way to enforce them is also a major

10. 1.The GP8-i is the first guideline pertaining
to IFIs’ financial reports presentations and
disclosures, was introduced in August
2003.
2.For commercial banks that practicing
Islamic Banking Scheme (IBS) or “Skim
Perbankan Tanpa Faedah” (SPTF), GP8-
1996 is used, so as to cater to the need for
specialized reporting and disclosure
requirements for commercial banks
participating in the interest free scheme.
MALAYSIA EXPERIENCE - MOVING FORWARD

11. 3. The minimum components of the specimen
under the GP8-i comprise the following;
Performance Overview
Statement of Corporate Governance
Directors’ Report
Statement by Directors
Statutory Declaration by Directors
Reports of the Auditors
Report of the Shariah Advisory Board
Balance Sheet
Income Statement
Statement of Changes in Equity
Cash Flow Statement
Notes to the Accounts
MALAYSIA EXPERIENCE - MOVING FORWARD

12. The obvious differences between GP8 and GP8-i
are the additional components to GP8-i:
(i) the Statement of Corporate Governance, and
(ii) Report of the Shariah Advisory Board.
(ii) BNM has taken into consideration the
requirement of AAOIFI and also the Bursa
Malaysia Berhad in its Revamped Listing
Requirements in 2001 for the issuance of the
Statement of Corporate Governance.
(iii)As prescribed in the guideline, it is to enhance
the disclosure practices and presentation of
reports and financial statements of IFIs. A
requirement of the GP8-i for the presentation
of Report by the Shariah Advisory Board is
also a requirement by AAOIFI, adopted into
GP8-i.
MALAYSIA EXPERIENCE - MOVING FORWARD

13. In summary, we can conclude that the needs for Islamic
financial reporting standards for IFIs is because of
• the nature of the IFIs itself that require the
information regarding business to be disbursed to the
users must be Shariah compliant, or else, it will not
represent the true colours of the business operations.
• by using Islamic financial reporting standards, it is
governed by divine injunctions and does not separate
the secular and religion and holistic in its reporting,
and thus, the objective of accounting and financial
reporting for the fair information flow to the
“accountee” or to the stakeholders and society at
large will be achieved. I
• t will also be the basis to provide guidance for
preparers in preparing a complete set of financial
statements.
• It will also ensure comparability of operational and
financial performance of all IFIs.
MALAYSIA EXPERIENCE - MOVING FORWARD

14. Islamic accounting standards
• To this date MASB has only come out with FRSi-1 with 2
Technical Release known as; (i) TRi-1: Accounting for Zakat on
Business, and (ii) TRi-2: Ijarah.
• Just recently, MASB has issued an Exposure Draft (ED) known
as Exposure Draft i-3: Presentation of Financial Statements of
Islamic Financial Institutions.
• Basically, the new MASB ED i-3 presents proposed
amendments to FRSi-1. The Board has proposed to revise
FRSi-1 to mirror proposed amendments to FRS 101, as set out
in MASB ED 61: Presentation of Financial Statements.
• This is to maintain consistency between the two standards.
The proposals in the two EDs would also bring the eventual
Standards closer in alignment to IASB’s IAS 1 (revised 2007)
which is largely in line with the equivalent standard issued by
the US-based Financial Accounting Standards Board (FASB).
The proposed changes also include a requirement on capital
disclosures, to incorporate consequential changes due to
IASB’s revision to IFRS 7
MALAYSIA ACCOUNTING STANDARDS BOARD (MASB)

15. FRSi-1: Presentation of Financial Statements of
Islamic Financial Institutions
• FRSi-1 is the first accounting standard specially created
for IFIs that is in harmony with the International
Accounting Standards (IASs). I
• in its development, MASB had also taken into
consideration the substance of AAOIFI Standards,
requirements of the Malaysia’s Companies Act 1965,
Basle requirements and the requirements by the Revised
Guidelines on Financial Reporting for Licensed
Institutions (BNM/GP8).
• MASB also recognises the fundamental importance of
Shariah requirement in developing this Standard and has
established a formal structure that allows for issues
relating to Shariah to be referred to the National Shariah
Advisory Council (NSAC) of BNM.
• The NSAC focuses its attention specifically to the
following aspects of the Islamic Banking operations:
• Cash and accrual accounting basis for income
MALAYSIA ACCOUNTING STANDARDS BOARD (MASB)

16. TRi-1: Accounting for Zakat on Business
• MASB recognised that there is a need to issue an accounting
pronouncement for zakat on business because, as mentioned
above, the zakat is so centre to the religion of Islam.
• TRi-1 sets out the overall considerations as well as requirements
pertaining to the recognition and assessment of zakat,
determination of zakat base used in zakat assessment,
presentation, measurement and disclosure of zakat information in
the financial statements.
• TRi-1 has stated that eventhough MASB has followed the
standards issued by AAOIFI as an instrumental in developing new
standards (e.g. accounting standard for zakat issued by AAOIFI
entitled Financial Accounting Standard 9: Zakah or FAS 9), The
Board has considered AAOIFI’s FAS 9 is inappropriate in the
Malaysia context because:
• (i) the accounting treatment prescribed are specific for
application by IFIs that also act as collectors and distributors
of zakat; and,
• (ii) the accounting treatments prescribed might run contrary to
state or federal legislation in Malaysia.
• This has evidenced that eventhough MASB has the option to
assimilate the FAS 9 as one of its standards, but MASB gives
cognisance that the disparity between Malaysia and Bahrain

17. TRi-2: Ijarah
• The proposed accounting treatment for Ijarah spelled out in TRi-2:
Ijarah share some of the treatment FAS 8: Ijarah whereby Ijarah
gives rise to two items – the underlying Ijarah item owned by the
lessor and the usufruct obtained by lesser.
• This create conflict

18. • Opinion differences among fuqaha
• Suitability of AAOIFI standards to the
domestic Islamic scholar
• Competent accountants and auditors
who are expert in both the
conventional and Islamic Accounting
• The necessity of new accounting
standard board.
• The coordination between the MASB
and the NASC
• Latest development of IFRS
CHALLENGES

19. • Example –
• the concept of cash and accrual accounting basis for income
recognition, the first experts (fuqaha) have determined that cash basis
of accounting to be a mode of practice to account for Islamic
transactions.
• However, some fuqaha have allowed the use of accrual basis in income
recognition on a concept that assumes that profit can be estimated
and distributed prior to completion of a contract and prior to
realisation of cash.
• Co-mingling of funds in Mudarabah contracts, separate legal entity,
going concern are concepts that cash accounting has failed to address
completely but they exist in the Islamic banking business today..
• The NSAC recognises that where fuqaha differ in their opinion. To
ensure consistency, fairness and transparency,
• NSAC has recommended the MASB to adopt a harmonisation
approach
• the NSAC recommended an accrual basis of accounting as a
benchmark treatment and an alternative to the benchmark
treatment is the cash basis of accounting.
• An IFI that opts for the alternative treatment will have to
disclose that fact in the notes to the financial statement, and
to disclose a reconciliation to reflect the financial position had
accrual basis been used
CHALLENGES

20. Why MASB’s efforts in developing Islamic accounting standards is
not at par with AAOIFI and the future options.
• the Malaysian Institute of Accountants (MIA) itself do not endorse to
the products of AAOIFI standards. Generally, most of the Islamic
products can be accounted according to the existing International
Financial Reporting Standards (IFRSs). They viewed the AAOIFI’s
standards is panacea of the ‘fire-fighting’ approach. The standards
produced based on products, without resorting to firm conceptual
framework as compared to IFRSs.
• Impliedly, we can conclude that is not that MASB do not want to
produce strings of Islamic accounting standards, but it is due to
general overview that the accounting itself is already seen as Islamic.
When only the principle of ‘form over substance’ endorsed by AAOIFI,
one particular argument that needs to be reviewed is; what is wrong
with the principle of the ‘substance over form’? The argument is that
since when Islam refuse to take the ‘intention’ or ‘niyah’ into
considerations? Most of sunni schools such as Maliki school of law
uphold that the ‘intention’ will be the determination in deriving to the
ahkam or rules due to certain acts.
CHALLENGES

21. THANK YOU