This paper presents the case of representing the Middle Eastern countries on the International Accounting Standards Board (IASB).International financial reporting standards (IFRS), IASB, MEC

Amged Abd El Razik

English

Research Papers in Economics

Scientific Bulletin – Economic Sciences, Vol. 8 (14) 
 
CHALLENGES OF INTERNATIONAL FINANCIAL REPORTING 
STANDARDS (IFRS) IN THE ISLAMIC ACCOUNTING WORLD, CASE 
OF MIDDLE EASTERN COUNTRIES 
  Ph.D. Candidate
 Amged Abd El Razik 
The Bucharest Academy of Economic Studies Bucharest 
amged_abdelrazik@hotmail.com 
 
Abstract: This paper presents the case of representing the Middle Eastern countries on 
the International Accounting Standards Board (IASB).It can give MEC countries the 
chance  to  participate  in  setting  up  the  IFRS  that  go  along  with  their  economic 
environments and Islamic rules rather than just apply what other world regions agree 
on. It shows the benefits of the region to the world and the main different in culture, 
economic and accounting system. 
Key words: International financial reporting standards (IFRS), IASB, MEC 
JEL codes: M41; H3; F5 
 
1.  INTRODUCTION 
While 15 out of the 21 Middle Eastern Countries – which information is available- require 
or  allow  companies  under  their  financial  authorities  to  use the  globally  known  international 
financial  reporting  standards  (IFRS),  only  three  countries  –  out  of  the  21  countries  -  have 
developed  their  national  generally  accepted  accounting  principles  (GAAP),  are  still  asking 
companies under their financial authorities to follow them, and are not allowing any company to 
use other standards. 
In  addition,  2/3  of  the  Arab  countries  are  members  of  the  international  federation  of 
accountants. 
Table 1. IFRS in MEC  
------------------------------------------------------------------------------------------------------- 
Country       Membership of IFAC    Accounting principles used         Notes 
--------------------------------------------------------------------------------------------------------- 
Morocco      Yes    National GAAP                    IFRS are permitted 
Tunisia      Yes    National GAAP    IFRS are permitted 
Algeria      No    National GAAP    IFRS are permitted 
Libya      Yes    National GAAP    IFRS are permitted 
Egypt      Yes    IFRS 
Jordon      Yes    IFRS 
Israel      Yes    National GAAP           IFRS are not permitted 
Lebanon      Yes    IFRS 
West Bank and Gaza  No    IFRS 
Syria      Yes    National GAAP                  IFRS are not permitted Ph.D. Candidate
 Amged Abd El Razik 
 
Iraq      Yes    No Information 
Saudi Arabia    Yes    IFRS 
Oman      No    IFRS 
Yemen      No    No Information 
UAE      No    IFRS 
Qatar      No    IFRS 
Bahrain      Yes    IFRS 
Kuwait      Yes    IFRS 
Iran      Yes    IFRS                               IFRS are not permitted 
 
In spite the positive relationship between IASB and the Middle Eastern countries, they still 
don’t have any role or present or special consideration as any other country or region, within the 
agenda and the timetable of the IASB as well as during any standard setting process engaged by 
it. The current regional representatives are mainly from EU, NA, Japan, Australia and South 
Africa. 
The Middle Eastern countries heading that, their region should take more concern in order 
to achieve better convergence while understanding and enforcing accounting standards around 
the globe. 
According to the Chairman of the IFRIC, Robert Garnett “with oil revenues being directed 
into large investments, the region is increasingly being seen as a potential partner”. 
Taking  into consideration the rule the  middle east countries play over the whole world 
policy, investments, capital market which shows how important for  IFRS to adapt because the 
totally different environmental factors that are considered by the IASB while setting IFRS. The 
decision of which standards to choose, for a nation, usually depends on the culture (Askary, 
2006), legal system, taxation, business organizations and ownership, as well as on the accounting 
profession within a country or a region. Previous researches have proved that all these factors are 
indeed  significantly different between the  Middle East countries and the whole other world. 
Thus,  if  the  IASB  is  talking  about  global  convergence  of  accounting  standards,  it  needs  to 
understand that there are vibrant and evolving markets in other parts of the world, other than 
Europe and North America, which have special features which need to be addressed. 
IASB main duties are preparing, generating, reviewing and exposing IAS and IFRS. The 
goal of IASB is attached to the idea of globalization and is simply a hope that the whole business 
world  will  follow  one  set  of  accounting  standards.  It  is  also  important  to  notice  that  each 
standard must be approved by at least 8 members of the IASB, out of the IASB 14’s members, in 
order to be considered for issuance. 
The accounting professionals and experts of the MEC (Middle Eastern Countries) can point 
to various cultural factors as well as to key interests at stake and international concerns while 
discussing their right of being represented on the IASB. 
2. CULTURAL FACTORS 
2.1 ISLAM AND EMERGENCE OF ISLAMIC FINANCE 
First,  Islam’s  role  in  the  world  is  becoming  much  more  influential.1.6  billion  people, 
currently representing 25% of the world total population, are Muslims(According to CIA fact 
sheet and www.islamicpopulation.com). Second, among the 18 oil producing countries, ten are 
Muslims countries and provide 40% of the aggregate world oil production. Third, in addition to 
the role of Muslims countries in the international trade, Islamic Finance is emerging as a major Challenges of international financial reporting standards (IFRS) in the Islamic accounting world, Case of 
Middle Eastern Countries 
2 
 
force in the banking and investment world and is still in its growth stage. The Islamic bank of 
Britain, Amana Mutual Funds Trust, American Finance House- LARIBA Bank, MSI financial 
services corporation and Manzail are just few examples of the various finance institutions that 
are engaged in this field of finance. Furthermore, MEC are members of the World Bank, UN, 
WTO,  and  most  other  international  organizations.  These  organizations  are  giving  special 
attention in their periodic reports to Islam as a religion and to it followers needs and demands 
because of their belief about their current and prospective potential, However, we find that MEC 
was represented by 2 members only in the Standard Advisory Council (SAC) from 2001 till 
2005, among 49 members of the SAC of the IASB, recently the MEC are not represented at all 
by any member! 
In 2001 there were two members representing the middle East, Mr Adir Inbar (Israel) and 
Mr. Rifaat Ahmed Abdel Karim ( Bahrain) taking into consideration that Israel don’t represent 
any of the Muslim population and the fact that all the Arab countries-except two- don’t have any 
direct connections with Israel, which means one of the two members representing middle east. 
2.2 RELATIONSHIP OF THE MEC WITH ISLAMIC FINANCIAL INSTITUTIONS 
Currently, Islamic financial institutions are represented on the SAC by an Islamic services 
Board (IFSB) member, without any consideration for the MEC and the accounting and Auditing 
organizations for Islamic financial institutions (AAOIFI). 
Both f them – the AAOIFI and the IFSB- should be represented, this is because, in reality, 
while the IFSB  is concerned with  finance  issues related to Islamic  financial  institutions, the 
AAOIFI deals with the accounting standards issues related to these institutions. 
As long as most of the members of IFSB and AAOIFI are from the ME countries, Thus, 
IASB  should  consider  the  accounting  polices,  practices,  and  concerns  of  the  MEC  while 
reviewing, merging and interpreting the previously issued IAS or establishing the new (updated) 
ones. 
2.3 EFFECT OF CULTURE ON ACCOUNTING STANDARD SETTING PROCESS 
Accounting  standards-IFRS  or  any  National  GAAP-  are  influenced  by  the  surrounding 
culture to a great extent, after 1972, the main concern of the accounting world’s professionals 
has  been  to  reduce  the  differences  between  the  different  accounting  principles  among  the 
different countries. The IASCF and IASB were created for this purpose. 
MEC and any other country , regardless of its representation status on the IASB, should 
have the right to bring up its concerns and discuss them with one of the IASB affiliates ( mainly 
IASCF, IFRIC, and SAC). Definitely, the IASB will remain the only body, and final decision 
maker, that decide which financial reporting standard to issue and recognize. This opinion is 
being  mentioned  because the  MEC are  facing  many  significant regulatory difficulties  in the 
current situation. They consider they can bring these difficulties to the attention of IASB in case 
they are represented. 
These  difficulties  may  include  the  IAS  24  that requires  all  the  transactions  with  “close 
family members of a related party” to be disclosed. Differences in cultures and type of family 
bonds make it more challenging for MEC accountants to adopt such standards. This fact is not 
fact is not very obvious to the current IASB team of representatives because close family ties and 
similar levels are not the same in all the world, they differ from region to another. At the same 
time, the IASB does not consider these facts because no one can, or will, bring this type of 
concerns to their agenda if those who are influenced by them and concerned are not represented, 
following up, or attending the IASB meetings on a regular basis. A presentation of this type of Ph.D. Candidate
 Amged Abd El Razik 
 
cultural differences by MEC accountants professionals, will leas IASB to be more convinced 
with the idea of inviting a MEC representative to its structure because such action will enhance 
the degree of understanding of new standards and make them more relevant to the interested 
users. 
3. ECONOMIC FACTORS 
3.1 ECONOMIC SIGNIFICANCE OF MEC COUNTRIES 
The MEC region  is known  for  its economic diversity,  it has recourse-rich and resource 
scarce countries. In aggregate, all of them- as a group- are doing well. Internationally, Growth in 
the Middle East and North Africa was robust in 2006, with real GDP rising 6.3% (2007). This 
extraordinary  growth-  the  strongest  in  more  than  10  years-occurred  despite  the  difficult 
conditions affected many countries, particularly the conflict-affected areas of Iraq, Lebanon ad 
the west bank and Gaza. Strong oil revenues and the ongoing European recovery provided the 
momentum  for growth, allowing per capita  GDP to rise 4.2 % despite  large  increase  in the 
population.  
According to the World Bank annual report real GDP of Middle east and North Africa reach 
5.3%, depending on the oil revenues, the region  is enjoying  large trade and current account 
surpluses. The current account surpluses as a share of GDP rose from 9.1 % in 2004 to 16.8 % in 
2006. This all means that the region is within the range of the economic expectations, regarding 
the increase in the rate of population- which fell from 2.5 % annual to 2 %, still higher than the 
international  rate  0.5  %.  Unemployment  dropped  from  more  than  15  percent  in  2000  to  11 
percent in 2007. This is all allows the MEC members and accounting experts to be represented in 
order to bring up their geographic diversity of professional backgrounds, present and protect 
their interests at stake and provide their advice to the IASB. 
3.2 BUSINESS ENVIRONMENT IN THE MEC 
If  the  IASB  would  like  to  base  the  representation  criteria  on  the  percentage  of  global 
participation, then again the MEC will not do badly. The business environment is attracting more 
investors day after day. With the establishment of new industrial cities and new property holding 
laws, according to a survey  made  by CONNECT-World CEO, the  middle east will  lead the 
world out of the current economic slowdown, according to 76 % of business leaders, almost two 
third of respondents say they are very optimistic about the long term prospect for their company 
in the middle east, with another 33 % optimistic.  
Regarding the stock market which is getting bigger having Saudi Arabia the largest listed 
foreign stock in the MEC region, reaching more than $ 26.5 billion followed by Egypt $ 14.5 
billion. Despite the financial crisis which affect the whole world market especially the stock 
market the level of profits that is being made in the region along with the successful strategies 
that are being set are launching partnerships of the MEC region with the rest of the world and are 
attracting new entrepreneurs to the MEC. Thus, it will be much better if MEC is represented on 
the IASB the same as each interested global business player, respecting their corporate laws, 
corporate acts and code of corporate governance. 
 
 
 Challenges of international financial reporting standards (IFRS) in the Islamic accounting world, Case of 
Middle Eastern Countries 
4 
 
4. MEC KEY INTERESTS  
4.1 FOREIGN INVESTMENT CONCERNS 
Planning is the 1
st step for any international company before investing in any other country 
or region all over the world, one step of this planning is making a study of the accounting system 
in the country they are interested in investing at it. 
Due to the location of the MEC between the East and west, it is an important location for 
most of the international companies. Which they are faced by the accounting system in the MEC 
countries which use various accounting system 
It  needs  to  satisfy  the  foreign  investors’  interests  by  using  set  of  financial  reporting 
standards (and not one set in each country) because this will reduce confusion, as well as error 
and fraud, which will lead to an increase in the degree of governance and trust. This transparency 
and trust can lead to better corporate governance that cannot be underestimated by investors who 
are targeted for providing foreign capital flows that cause growth, which is main concern for the 
region. 
Thus, it is an advantage for the MEC to follow IFRS and not to establish their own set of 
united reporting standards, however, the importance of transmitting the concerns of its countries 
to the IASB should  be understood. That is why  inviting  a MEC representative to the IASB 
structure will solve the adaptation problem, ensure that the IFRS will not harm it – but will only 
help it- and will serve the global accounting harmonization movement at the same time, instead 
of establishing new regional sets of IFRS. 
4.2 ACCOUNTING STANDARD DIFFERENCES BETWEEN IASB, AAOIFI AND MEC 
The accounting and auditing standards that are adopted by Islamic financial institutions are 
an  obvious  reflection  of  the  different  financial  instruments,  contracts,  insurance  and  interest 
laws,  ethical  standards,  and  types  of  business  organization  that  are  used  by  them.  These 
standards,  which  slightly  differ  from  those  set  by  the  IASB,  are  set  by  the  AAOIFI  which 
currently has 115 members from 27 countries. Specifically, they differ in five issues that are 
related to leases, restricted contracts, and specialty investment account (where the investors bear 
part of the business risk). 
Having a representative from the MEC in the IASB will facilitate a lot of issues as he will 
understand  these  differences  and  MEC  nation’s  common  sources  of  finance,  accounting 
regulations and framework, level of industrial development, as well as many other factors that 
are relevant, according to his experience and exposure. 
4.3 CHALLENGES OF COMPLYING FULLY WITH THE IASB 
IASB requires each organization to comply fully with IFRS in order to be considered as 
following IAS. Full compliance with each IFRS by the MEC is a real challenge at the current 
moment.  First,  complying  with  the  IFRS  mean  that  the  MEC  are  ready  to  abandon  their 
particularities,  replace  their  business  reporting  culture,  lose  the  control  process  of  standard 
setting,  and  use  the  one  that  is  accepted  by  the  IASB.  The  second  challenge  is  the  current 
unavailability of high qualified IFRS auditors and accounting staff in the MEC countries in the 
same level as in the western regions of the world. Third, until now the IFRS are not proving to be 
workable within the MEC context of national standards and that is why many standards have not 
yet been adopted in many countries. 
 
 Ph.D. Candidate
 Amged Abd El Razik 
 
5. CONCLUSION 
In conclusion, the above observations show that on the basis of any representation criteria 
(geographical location, GDP level or population) MEC will be capable of gaining a seat on the 
IASB structure as it is doing in other reputable international financial organizations such as the 
world bank and international monetary fund. 
If the world want to apply one accounting standards, IASB should recognize the importance 
of the Middle East countries in their structure, having a representative in the IASB will allow the 
MEC  to  apply  IFRS  in  all  the  countries  and  allow  the  IASB  to  apply  the  IFRS  in  a  very 
important  region  of  the  world,  because  otherwise  the  MEC  will  be  supporting  the  current 
available ideas of establishing the Association of Gulf Cooperation Council (AGCC) accounting 
system or MEC accounting system. Finally, it can be said that IASB and MEC have to recognize 
and respect each other because of the simple fact that each of them creates a benefit for the other. 
Definitely  this  can  be  appreciated  and  considered  more  after  acknowledging  the  number  of 
Middle Easter countries that are currently complying with IFRS and also after concentrating 
more on the idea of perfect harmonization.  
REFERENCES 
 
1.  Askary, S (2006) ‘Accounting professionalism – cultural perspective of developing countries’  
2.  Mizra,  A.M.  1991.  ‘Social  reporting  and  managers’  self-interest  Accounting  Research 
Journal.7-17 
3.  Shahul Hameed bin Hj.’ From conventional to Islamic accounting’ 1996 
4.  AAOIFI, Annual report 2006, 2007, 2008 
 
 
 
 
 
 
 
 

Accounting professionalism – cultural perspective of developing countries’

Annual report

Shahul Hameed bin Hj.’ From conventional to Islamic accounting’

Social reporting and managers’ self-interest Accounting Research Journal.7-17

Challenges of international financial reporting standards (ifrs) in the islamic accounting world, case of middle eastern countries

http://economic.upit.ro/repec/pdf/F2_Amged_Razik.pdf

Challenges of international financial reporting standards (ifrs) in the islamic accounting world, case of middle eastern countries

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics