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A critique on accounting for the mudarabah contract

Muhannad A. Atmeh (TAS Graduate School of Business, German Jordanian University, Amman, Jordan)
Abdul Hadi Ramadan (Amman Jordan Accounting Department, Al Isra University, Amman, Jordan)

Journal of Islamic Accounting and Business Research

ISSN: 1759-0817

Article publication date: 13 April 2012

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.

Keywords

Citation

Atmeh, M.A. and Hadi Ramadan, A. (2012), "A critique on accounting for the mudarabah contract", Journal of Islamic Accounting and Business Research, Vol. 3 No. 1, pp. 7-19. https://doi.org/10.1108/17590811211216032

Publisher

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Emerald Group Publishing Limited

Copyright © 2012, Emerald Group Publishing Limited