Islamic Financial Instruments: Accounting of Equity-Based Contracts
This chapter discusses the accounting and financial accounting treatment of equity-based Islamic financial instruments focusing on musharaka and mudaraba Islamic finance principles. The equity-based contracts category includes the Islamic finance principles of partnership (Musharaka), profit sharing (Mudaraba), investment agency (Wakala), followed by much less common principles, such as Mugharasa, Musaqa and Muzar’a (labour and materials profit sharing contracts related to agricultural financing). As the core of these three principles is labour and profit sharing arrangement, it would fall under Musharaka instruments. This chapter builds on the influencing theories and the Islamic worldview about money and accounting that I discussed in earlier chapters of this book to formulate the practical aspects of the Islamic accounting system. In that respect I analyse here the accounting treatment and financial reporting of equity-based financial instruments in Islamic finance and its requirements in the Islamic jurisprudence.
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