Tax treatment

Differences between Conventional and 
Islamic Finance Transactions - Examples
(continued)

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10
Tax Treatment on
Islamic Finance 
in Malaysia
Islamic Finance Transactions: Financial 
Reporting Standards in Malaysia
In view of the rapid acceptance of 
Islamic finance in the global market 
and as a way to achieve sizeable 
critical mass before the sector can 
offer comprehensive alternatives to 
conventional banking products and 
financial services, there is an urgent 
need to address issues on accounting 
and financial accounting, auditing 
and governance framework for Islamic 
finance.
The Accounting and Auditing 
Organisation for Islamic Financial 
Institutions (AAOIFI) which was 
established in 1990 located in Bahrain 
has, ever since its inception, issued 
more than 60 accounting, auditing, 
governance and Shariah standards 
for Islamic institutions. Despite AAOIFI 
being a pioneer in the Islamic standard-
setting, the Malaysian Accounting 
Standards Board (MASB) has concerns 
that its accounting standards may not 
have been developed based on a 
conceptual framework similar to the 
MASB approved accounting standards. Thus, MASB has not approved AAOIFI financial accounting 
standards for use by entities under its purview (extracted from MASB’s website 
www.masb.org.my
). 
This simply means that an entity may not apply AAOIFI recognition and measurements that depart 
from MASB requirements. However, the inclusion of additional disclosures required under AAOIFI 
standards, if appropriate, may be acceptable.
In the Malaysian context, the Malaysian financial institutions shall account for Shariah-compliant 
transactions and events in accordance with MASB approved accounting standards which is now 
known as Malaysian Financial Reporting Standards (MFRS) after convergence with the International 
Financial Reporting Standards (IFRS), unless there is Shariah prohibition. Thus far, the MASB accounting 
standard requirement has no violation of the Shariah principles. As such, in the event where, under 
extremely rare circumstances, there is a Shariah prohibition to MASB requirement, that requirement 
need not be complied with and MASB will undertake to issue alternative guidance. Hence as at to-
date, MASB does not issue separate Islamic accounting standards for this purpose. 

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