Historical Cost versus Current Cost
Accounting in an Islamic environment should be good for all interested parties or the stakeholders unlike the conventional accounting that focuses on a select few only. Many Islamic scholars are in agreement that the current costs accounting (CCA) is the nearest to the fulfillment of Islamic needs where the assets of the business are valued or evaluated according to the cash or the generalized purchasing power that could be obtained by selling each asset under conditions of orderly liquidation. So, the quoted market price for goods of a similar kind and condition is used in the balance sheet, as past prices (historical costs) are not relevant for future action (Akram Khan, 1994a). To date, waqf accounting still used the historical cost to record the waqf assets in Malaysia. In fact, this is being practiced in most Muslim countries.
Therefore, current costs accounting (CCA) will reflect the real-time value in the accounts on the balance sheet date (see Foo, 2006 on fair value accounting). It is argued that CCA will minimize the subjective judgments about the future (Chambers, 1966 as cited in Mirza and Baydoun, 2000) as in other types of measurement in the valuation of the assets.
Depreciation costs are forgone in current cost accounting as it is not an actual cost, rather an allocation of the whole amount of capital expenditures which may be subjected to management discretion, rather, current equivalent value promotes fairness and justice because it reflects the most reliable value, as the value of the assets are definitely increased or decreased according to time and must be accounted for to give the true state of wealth (see Mirza and Baydoun, 2000).
So, the focus is now shifted towards the perspective of wealth (more suited to waqf) rather than the profit or loss viewpoint of the business. This measurement is also in line with the measurement of assets for zakat purposes and it dispenses with the need for any inflation accounting as it has already incorporated inflation into the current price.
Determination of profit is made simple and objective where profit is derived from the differences between assets and liabilities. The adoption of current costs accounting (CCA) will forgo the accounting concepts of going concern and conservatism as used in the historical cost accounting. It will subsequently promote a true and fair accounting that is more desirable in an Islamic accounting environment as argued by Baydoun and Willet (1997).
From the conventional accounting point of view, historical cost is said to be very objective and reliable because the exact amount of costs incurred for each asset is used (Liang, 2001). Whereas, current cost depend on the independent valuation (current market value) and is very subjective in nature, unless it is done by a professional valuer. Critics of historical cost assert that the changes in the asset value during the entity's ownership must be recognized accordingly in the accounts especially due to the fact of inflation. Therefore, reporting of the assets and liabilities using historical cost is deemed as less relevant compared to current value especially in the decision making process (Foo, 2006). A problem will arise because some assets are unique and they do not have the replacement value in the market. However, getting the exit value in a closed market may solve this. The issue of who would bear the valuation costs would also arise (Akram Khan, 1994a).
Fundamentals of Islamic Accounting and the Unsuitability of Conventional Accounting
Islamic business characteristics do not merely comprise technical and moral conduct; rather ethical consciousness is a part of the package of true Islamic business practices. Thus, the concept of Adala (justice) and Ihsan (benevolence) should be incorporated as well (Shahul and Yaya, 2001). The upholding of justice is found in many verses of the Qur'an where Allah (s.w.t.) has commanded Muslims to be just in all circumstances. Meanwhile, according to Siddiqi (1979), benevolence (ihsan) is the good behavior or an act that benefits the other persons without any obligation.
There are several reasons for the unsuitability of conventional accounting. Firstly, the objective of conventional accounting to provide information to the existing and potential shareholders, investors, creditors and other interested parties is deemed not sufficient under Islamic accounting (Shahul, 2000; Shahul and Hisham, 2006). In fact, Islamic accounting has a much broader objective. Islamic accounting should provide useful information, financial and non-financial, for the stakeholders to make decisions. Shahul and Yaya (2001) cited Gray (1994) who asserts that conventional accounting has directed organizational growth at the cost of environment degradation. Briloff (1996) and Arnold and Cooper (1999) argue that conventional accounting has contributed to the concentration of wealth at the expense of the public in the hands of a few individuals only (Shahul and Yaya, 2001). Furthermore, the decision usefulness in the conventional accounting is argued to have deficiencies in the context of Islamic accounting in terms of its users' focus of its accounting information. Next, Gray (1996), as cited in Shahul and Yaya (2001), argues that conventional accounting operates under the assumed pristine liberal economic society where the gap between the poor and the rich is not questioned and there is no room for environmental, social responsibility and ethical values other than utilitarian self-interest. Moreover, Shahul (2000) asserts that conventional accounting is being used to enrich the shareholders and creditors only, without much concern even for their own employees (Shahul and Hisham, 2006).
