A critique on accounting for the mudarabah contract

Muhannad Ahmed Atmeh · Abdul Hadi Ramadan

32 citations0/0 files storedJournal of Islamic accounting and business research

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Islamic Finance and Banking Studies Accounting Theory and Financial Reporting Accounting and Financial Management

Abstract

Purpose The purpose of this paper is to examine the accounting treatment for mudarabah contract and its implications on the reliability and fairness of the financial statements. In addition, the paper also aims to explore the effect of provisions and reserves on profit allocation among unrestricted investment account holders (UIAHS). Design/methodology/approach This study reviews the accounting treatment for mudarabah contract as stated in the Accounting Standards for Islamic Financial Institutions issued by the AAOIFI and compares it with other financial reporting frameworks, especially the IFRS. Findings The paper finds that presenting UIAHS in a separate category in the financial position statement (balance sheet), without reclassifying the assets in the financial position statement to reflect the assets attributable to UIAHS, suggests undue bias in the financial statements. This contradicts the concepts of full disclosure and true and fair view of the financial statements. The paper also reveals that reserves may result in profit misallocation among UIAHS. Additionally, there is an overlap between provisions and reserves, which may affect the reliability and fairness of the financial statements. It is also revealed that reserves presented under the UIAHS section could not be readily understandable since investors have no right to these reserves. The paper further finds that using a donation contract in business may result in diverting wealth from the less wealthy to the wealthier. Originality/value The paper criticizes the AAOIFI treatment for UIAHS and suggests an extension to this treatment by presenting assets attributable to UIAHS in order to enhance disclosure. Additionally, it questions the applicability of using donation (Tabarru) contract in transactions with profit‐making substance.

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References

2010How ‘Islamic’ is Islamic Banking?2000Islamic Corporate Reports 2009Critical insights into contemporary Islamic accounting 2009Profit-sharing investment accounts in Islamic banks: Regulatory problems and possible solutions 2010Do Islamic banks use loan loss provisions to smooth their results?2010Supervisory, regulatory, and capital adequacy implications of profit‐sharing investment accounts in Islamic finance 1993CREDIBLE ORGANIZATIONS: SELF-REGULATION v. EXTERNAL STANDARD-SETTING IN ISLAMIC BANKS AND BRITISH CHARITIES

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