A Critique On Consolidation Accounting For Islamic Financial Institutions

Abstract

Since the establishment of the AAOIFI in 1990, 94 standards in areas of Shariah, accounting, auditing, ethics and governance have been issued, accompanied with a wide acceptance by many countries in which the AAOIFI standards became voluntary or obligatory adopted. Hence, as a newly established Shariah-based accounting standard setting organization, a study that investigates the compatibility of AAOIFI accounting principles with the issued standards, along with examining the usefulness extents of these standards to the different stakeholders is a necessity. To this end, this paper investigates the compatibility of the principle of "form-over-substance" with the AAOIFI FAS 23(Consolidation) as applied by parent IFIs, along with examining the usefulness extent of consolidated reports for IFIs to the different stakeholders. The paper is based on documentary and textual analysis of Islamic accounting theory. The study concluded that consolidation accounting is considered as one of the very first expression of the substance over form principle because it gives priority to the reality of economic relationships over legal form. Meaning that, a large discrepancy between consolidation accounting principles and the framework of principles as set forth by the AAOIFI is existed. Furthermore, the study concluded that stand-alone financial statements for a parent IFI are crucial for stakeholders to evaluate financial performance of the parent IFI accurately.