Introduction

International Financial Reporting Standards (IFRS) are accounting standards adapted or adopted in more than 120 countries across the world set by the International Accounting Standards Board (IASB). There are more than accounting principles which guide countries to formulate their own accounting standards according to their local needs, rules and regulations. For example, Malaysian Accounting Standard Board formulates their own accounting standards based on the IFRS principles. The acceptance of IFRS has grown significantly not only in European countries but also in the USA, where General Accepted Accounting Principles were widely used before worldwide convergence towards IFRS. This convergence of course help not only international acceptance and rating of sovereign but also give better comparability picture for multinational investors for whom it would be easier to compare various potential investing companies from different jurisdictions. Emergence of Islamic finance and need for Islamic accounting

The growth of Islamic finance, more specifically, Islamic banking in the last four decades has been phenomenal and many Muslim and non-Muslim countries have started to promote Shariah based financing on the backdrop of global financial crisis, where corruption, manipulation, frictional reserve and subprime credit were rampant and many scholars have started to ask the credibility of financial institutions (Zingales, 2015). The rapid growth of Islamic banking industry in the late eighties and early nineties stimulates to establish a separate accounting standard setting organization for Islamic Financial Institutions (IFIs), consequently on the 27th March 1991, Accounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) was established in Bahrain. AAOIFI has so far issued 26 accounting standards for IFIs and currently, as an independent international organization, AAOIFI is supported by institutional members (200 members from 40 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide. AAOIFI standards are followed as part of regulatory requirement or IFIs internal guidelines in jurisdictions that offer Islamic finance across Middle East, Asia Pacific, South Asia, Central Asia, Africa, Europe, and North America; and Islamic Development Bank Group (AAOIFI, 2010; AAOIFI Official Website).

Objective of the Study Prohibition of Riba, Gharar and Maysir in financial transactions is the fundamental of Islamic finance which distinguishes it from conventional finance. In addition to that, financial behavior, practice and contract used by IFIs must be in accordance with the Shariah principles. Although most of the accounting principles issued by IFRS are more or less in line with the Shariah, however, there are many principles which may contradict with the core principle of Shariah, as a result, many scholars propagate for separate accounting standards for IFIs. In the ISRA research paper An Appraisal of the Principles Underlying International Financial Reporting Standards:A Shariah Perspective, researchers discuss whether the key underlying principles of IFRS are acceptable from the Shariah perspective based on the classical fiqh literature and Shariah resolutions from local and international organizations, the four key principles are: 1) substance over form, 2) time value of money, 3) fair value measurement, and 4) recognition based on probability.

We are going to discuss in details above mentioned four accounting principles from conventional accounting point of view and start to explore classical fiqh literature and resolutions mentioned in the ISRA paper and

beyond to support or argue against their view and finally give our own judgment based on the existing literature.

Time value of money

Time value of money is the core principle of finance which explains that money available today is worth more than the same amount in the future; this is because of potential earning capacity of money in the form of interest or be invested up until the time the future dollar is received1. In other words, money is worth more to an economic actor if it is available immediately for consumption or investment purpose. This concept applies to many contracts; for example, credit sale, and stock, project or company valuation. This concept may be thought of as a financial application of the saying, "A bird in the hand is worth two in the bush." Based on this, it is argued that since current consumption brings more satisfaction than future consumption, people (i.e. creditors) who are asked to postpone current consumption must be compensated for the pleasure foregone today. Hence, in a capitalist economy, this positive time preferencean alternative term for time value of moneylays the rationale for the payment of interest.

Interest, Time Value of Money, Discounting Factor and Its Implications

Interest is defined in IAS 39 as the consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time. As the computation of the time value of money and the discounting technique used in calculating Net Present Value (NPV) generally involve reference to the interest rate, many Muslim jurists consider this non-permissible as it is in conflict with the outlawing of interest charges (Riba) under the Shariah (AOSSG, 2010). In other words, as conventional finance revolves around the interest rate, time value of money is acceptable principle, however, some controversies arise in Islamic finance when we consider in credit sale the deferred price is higher than the spot price, also interest rate as a discounting factor to get the NPV of future cash flows of a stock, project, or company. Consequently, Islamic banking in its current form also appears to accept the validity of charging higher prices for future payments in comparison with prices for immediate payment, such as in the case of the murabaha (cost plus profit) contract. For example, an Islamic bank may charge a customer MYR 2 million for a house if he chooses to repay over twenty years, but only MYR 1.5 million if he pays immediately in full.

In the following section, based on the ISRA article we are going to discuss the concept of time value of money and various issues from the fiqh sources starting from the Quran, the Sunnah, classical and contemporary jurists and the fiqh scholars. The concept of time value from the classical to contemporary jurists The paper argues that a literature review shows that the Shariah does not totally role out the concept of the time value of money. Authors provided authentic Quranic verses (The Holy Quran, 75: 20-21; The Holy Quran, 87:16-17) to support the permissibility of the value of money however, some scholars tend to disagree and they argue that these verses have nothing to do with the time value of money, it is mere admonishing of people who prefer life here than life hereafter. However, we can argue that an innate human nature (fitrah) is Time value of money. (n.d.) Financial Glossary. (2011). Retrieved October 2 2015 from http://financial

dictionary.thefreedictionary.com/Time+value+of+money

to prefer present gratification (al-Masri; Khan FM; al-Zarqa) even though higher reward granted by Allah (SWT) for deferred gratification and some people still prefer not to spend money immediately and save it for the future consumption (Al-Muwdudi, Khan MA). Furthermore, classical and contemporary jurists of four major schools of thought like, Al-dasuqi, Al-Kasani, Al-Sharbini, and IbnTaymiyyah support the time value of money concept but not sound opposition from scholars are noted in the paper. Therefore, we can state that the time value of money concept in exchange contracts is well accepted among majority scholars but not in loan contracts as the subject matter is money rather than an underlying asset. In this manner, positive time preference has been found acceptable to Shariah scholars in an exchange contract (Khan, 1991; Khaf, 1994; Ahmad and Hassan, 2004).

It is well argued in the article that Shariah permissibility of bayal-salam and bay al-istisna further strengthens the support in favor of time value of money. However, we can argue that the difference in the present and future values of the same commodity cannot be considered to have been allowed just because of the pure time element involved (Khan, 1991). As Khan argues that the jurists could have allowed this difference because they recognized that supply and demand forces are different at different points of time. Refuting the idea that demand and supply in the future must have been considered to permit bay` muajjal, Kahf argues that the legitimacy of bay` muajjal and bay` salam can be rationalized along the lines of musharakah, mudarabah, and ijarah on the basis of ownership and the distinction between moneys anticipated and realized time value (Kahf, 1994). According to Siddiqui, unlike Kahfs assertion, bay` muajjal is neither similar to mudarabah or musharakah, nor could its permissibility be linked to bay` salam. While the paper argues that the time value of money concept is also applicable in evaluating projects under construction and higher deferred price in future is settled but the issue of using interest rate in the discounting process, similar to the conventional practice, given that the Shariah prohibits a fixed promised return on debt transactions, the issue was also raised by PricewaterhouseCoopers (2010) more specifically, the question is whether the use of a discount rate benchmarked to the interest rate for calculation of fair value purposes actually poses a problem in the context of Islamic financial transactions. Khir (2012) states that there is no consensus regarding this among scholars, some argue there is no issue in using interest rate as a benchmark as they consider this a human innovations which do not contradict Shariah. On the contrary, Zarqa (1983) totally rejects it although he concluded that discounting is accepted and even desirable for promoting investing efficiency, consequently he proposes to use return on equity as the appropriate discounting rate.

Based on the research paper, we can argue that economic agents in an Islamic economy will have positive time preference and there will be indicators available in the economy to approximate the rates of their time preferences. There is no justification to assume zero rate of time preference in an lslamic economy as is done in many studies on investment behavior from lslamic perspective (Khan, 1991; Khaf, 1994; Ahmad and Hassan, 2004). In the following section, we are going to present a review of selected works on the time value of money from Shariah perspective.

A Brief Review of the Literature

Khan (1991) states that Anas Zarqa, Rafiq al-Masri and Rauf Azhar accepts the concept of positive time preference and time value of money. By analyzing classical and contemporary fiqh scholars and jurists he also confirms that positive time preference or time value of money is acceptable as long as it is not claimed as a predetermined value. Furthermore, he proposes return paid by Islamic banks on deposits of different

maturities to be considered as a close proxy for discount rates for the evaluation of projects of different maturities(Khan, 1991).

While critically analyzing Khan(1991), Kahf (1994) considered time value of money is an investment phenomenon not a phenomenon related to abstention from current consumption. Time preference is, therefore, a real factor in the mind of the income earner and provider of investible funds. He further argues that the valuation of time preference can only be affected ex-post because its nature does not allow an opportunity of knowing it ex-ante (Kahf, 1994).

Ahmad and Hassan (2004) argue that any conditional increase in the loans principal in return for a deferred repayment due to an expected depreciation in the value of the money, asset, or other factors (e.g., inflation and commercial losses) is prohibited. They further state that even though there is near consensus among Islamic jurists that in a credit sale contract where repayment is deferred, a commoditys price may be increased. However, the issue remains unresolved from an Islamic legal financial perspective (Ahmad and Hassan, 2004).

Pervez, on the other hand, argues that there are no specific Islamic theories on moneys time value, since postponing an assets enjoyment to a future date is, in effect, a sacrifice made by the investor; an expected depreciation of the moneys or assets value due to factors related to inflation, depreciation, and commercial loss (Pervez, 1997).

Khir (2012) states the opponents of TVM have argued that recognizing it will lead to acceptance of Riba, against which Islam is at war however, he concludes that Islamic acceptance of TVM should not be disregarded, particularly in financial transactions, such as deferred sales and loan contracts, in order to uphold justice. He further argues that if the Shariah parameters are completely complied with, the application of TVM may result in removal of Riba and achievement of fair economic effects in financial transactions (Khir, 2012).

From the above discussion, we can conclude that the principle of time value of money (TVM) is controversial as Islamic scholars hold differing views regarding its conceptual and practical foundation in the Islamic financial system. The opponents of TVM have argued that recognizing it will lead to acceptance of Riba, against which Islam is at war. (al Mawdudi, Khan M A). There are arguments for time value of money as time can be given a counter-value in association with real commercial activities; as a result, this concept should not be disregarded in financial transactions, such as deferred sales, in order to uphold justice, given that it must be applied in accord with the specific Shariah parameters. It can be concluded that the Islamic legitimacy of TVM is established on four bases: 1) the concept of Positive Time Preference (PTP); 2) the permissibility of a different price in a cash sale as opposed to a credit sale; 3) the permissibility of bayal-Salam and bayal-Istisna; and 4) Islamic legal maxims.

Resolutions on the Time Value of Money

As discussed in the paper, the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) resolved that the application of time value of money principle in Islamic financial reporting is permissible only for exchange contracts that involve deferred payment. Nevertheless, the SAC prohibits the charging of an extra

sum for deferred repayment of Qard (loan). The SAC explained that the jurists had long accepted that there is an economic value to time and quoted various classical statements permitting an increase in value due to the lapse of time.

OIC Fiqh Academy also resolved that deferred installment sales are permissible even if the deferred price is more than the immediate price. It is also stated in the ISRA paper that the application of deferred installment sales such as the murabaha contract is unanimously permitted by other authorities such as Kuwait Finance House, Dubai Islamic Bank and al-Rajhi Bank. The contemporary Middle East Shariah scholars recognize the principle of the time value of money in the sale contractnot in a lending contractand thus allow for the variance of price between cash and deferred sales.

By examining resolutions and guidelines regarding the application of time value of money in Islamic financial transactions, we can argue that majority scholars accept the current use of time value of money concept in murabaha financing as there is an underlying asset and higher deferred price is justified due to risk associated. However, there is no resolution so far regarding using interest rate as a discounting factor in capital budgeting technique but some scholars seem there is no issue in using interest rate as a benchmark (Karim, 2001). Therefore, we tend to agree based on the principle of permissibility in muamalat otherwise not prohibited by Shariah is permissible, the time value of money is the fundamental principle of finance, and majority scholars agree that time does have economic value, therefore they approve time value of money concept in exchange contract and prohibit mere charging of interest on loan contract.

Do We Really Need Accounting for Islamic Financial Transactions?

There are opinions for and against separate Islamic accounting. Many scholars state that accounting is process of recording, storing, anazlying and presenting financial information to management and stakeholders in order for helping in their decision making, consequently they argue that there is no need for separate Islamic accounting On the other hand, many Islamic scholars and jurists argue that conventional accounting principles are based on interest rate, money is considered as commodity hence a creditor expects fixed increase in value of money over certain time period therefore need separate accounting standards (Napier, 2007; Sarea & Hanefah, 2013). Interest rate is greatly interconnected with the key accounting concept like time value of money and fair value estimation technique, where interest rate is used as a discounting factor for present value calculation of future stream of cash flows. After analyzing four key accounting principles from Islamic Shariah perspectives, the original sources (the Holy Quran and the Sunnah of the Prophet (PBUH)), classical and contemporary juristic opinions and resolutions from various Shariah Advisory Councils, it is more than evident that there are mix in opinions among Shariah scholars regarding these principles. One the one hand, we can argue that accounting is above all accounting and it is considered as human innovation, where there are very little or no Shariah issues involved (citation needed) as our analysis also support that, majority scholars didnt find any contradiction in using such accounting concepts as substance over form, time value of money, fair value estimation and probability. On the other hand, it can be argued that Islamic accounting is absolute necessity for IFIs as their ultimate goal is not only to maximize shareholders wealth but to maximize the welfare of stakeholders and uplift maqasid al-Shariah. As accounting information plays a vital role for management, board of directors, regulators, government agencies, existing and potential investors, the permissibility of each and every transactions in IFIs must be in accordance to Shariah so that they all stakeholders can make rational and informative decision and minimize asymmetry of information which exist in conventional accounting practices, like sophisticated manipulation and double accounting i.e. accounting for internal use and external reporting in order to get unfair advantages. Therefore, in order to upheld the principles of Shariah let alone establish an interest free economy, just, fair and ethical accounting practices is necessary, consequently, it can be argued that Islamic accounting can fulfill the vacuum exist in conventional accounting practices.

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