Maslaha-Based Value-Added Statement

GATR Accounting and Finance Review Journal homepage: http://gatrenterprise.com/GATRJournals/AFR/vol7_2022_issue2.html Acc. Fin. Review 7(2) 113 – 123 (2022) Maslaha-Based Value-Added Statement M. Nur A. Birton1*, Mahfud Sholihin2, Muhammad Muttaqin3 1 Universitas Muhammadiyah Jakarta, Jakarta, Indonesia 2 Universitas Gadjah Mada, Yogyakarta, Indonesia 3 Universitas Muhammadiyah Jakarta, Jakarta, Indonesia ABSTRACT Objective - This article aims to (1) examine three concepts of practical ethics originating from fiqh muamalah studies, namely al kharaj bi al dhaman, maslaha, and nafaqa, as substitutes for the more philosophical basis of Baydoun and Willett’s (2000) Islamic ethics; and (2), apply the three concepts to improve the structure and content of Baydoun and Willett’s (2000) value-added statement. Methodology/Technique – Maslaha-based VAS can improve VAS weaknesses in Baydoun and Willett’s (2000) ICRs and be an alternative to the 1993 and 2010 AAOFI income statements. Findings – The use of the kharaj bi al dhaman, maslaha, and nafaqa concepts could direct the content and structure of financial reports from the “secular” one into sharia and humanistic. Novelty - The application of the concept of kharaj bi al dhaman substitutes for the matching concept; the idea of nafaqa substitutes for expenses; and the notion of maslaha makes the maslaha-based VAS more powerful, philosophical, conceptual, and practical than the VAS of Baydoun and Willett and the AAOIFI income statement Type of Paper: Review JEL Classification: M41, M42. Keywords: Al kharaj bi al dhaman, Islamic corporate reports, maslaha, nafaqa, value-added statement. Reference to this paper should be referred to as follows: Birton, M.N.A; Sholihin, M; Muttaqin, M. (2022). MaslahaBased Value-Added Statement, Acc. Fin. Review, 7(2), 113 – 123. https://doi.org/10.35609/afr.2022.7.2(4) _______________________________________________________________________________________ 1. Introduction The efforts to establish and develop Islamic accounting as a formidable discipline of knowledge conceptually, theoretically and practices continue to pursue. Specifically, to support the practice in Islamic entities, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), previously known as the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI), has laid this foundation by adopting Western Financial Accounting Statements (WFASs) and then customized it to Islamic teachings in 1993 (AAOIFI, 2001). The formulation of these two ideas has resulted in the concept, form, and content of the financial statements of Islamic financial institutions (IFIs). ___________________________ * Paper info: Revised: July 13, 2022 * Accepted: September 30, 2022 Corresponding author: M. Nur A. Birton E-mail: [email protected]; [email protected] Affiliation: Universitas Muhammadiyah Jakarta, Indonesia ISSN 2636-915X, e-ISSN 0128-2611 © 2022 Global Academy of Training & Research (GATR) Enterprise. All rights reserved. M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin These efforts pragmatically seem successful. However, the values and choices of the two concepts that underlie the adoption of WFASs financial statements are not in line with Islam because they are full of Western values, which are capitalistic, individualistic, and secular. Scholars believe that modern accounting carries values of the West-Anglo Saxon tradition (Perera & Baydoun, 2007); acts as a tool for capitalists to rationally evaluate the consequences of their past actions (Carruthers & Espeland, 1991); and embodies the capitalism ideology (Adnan & Gaffikin, 1997; Napier, 2009; Walker, 2010), in which individualistic and secular characters are the backbone (Baydoun & Willett, 2000). Adnan and Gaffikin (1997) mention that the accounting concepts adopted by AAOIFI consist of the ideas of “going concerns, stability of purchasing power of the monetary unit, conservatism” and are derived from the idea of conservatism, such as “[historical] cost, realization, objectivity, and matching.” These accounting concepts are not sharia-compliant but biased towards the interests of capitalism and its values (Adnan & Gaffikin, 1997). AAOIFI’s version of Islamic accounting is nothing more than imitating Western accounting (Adnan & Gaffikin, 1997; Baydoun & Willett, 2000; Kamla, 2009; Mulawarman & Kamayanti, 2018). Explicitly, the conceptual framework of AAOIFI is similar to FASB (Karim, 1995); or resembles the IASB (Kamla, 2009). Moreover, Kamla and Haque (2019) claim that AAOIFI plays a role in perpetuating an accounting-imperialist network when developing “global” Islamic accounting ideas and standards. Therefore, the (new) Islamic accounting potentially returns to its initial capitalistic-secularistic nature (Hidayah et al., 2019; Kamla, 2009). As a result, accounting with an Islamic identity (Islamic accounting) becomes easily shaken and even denied. Napier (2009) concludes that there is no contemporary Islamic accounting except Western accounting, which is practiced in Islamic financial entities. Baydoun and Willett‘s (2000) critical perspective in an article entitled “Islamic Corporate Reports” (ICRs) provides an alternative to improve AAOIFI’s financial statements. They propose two markers to cover its shortcomings, namely (1) value-added statement (VAS) as a substitute for income statement; and (2) current value balance sheet (CVBS). VAS is chosen because it has the potential to actualize social accountability as it shows a more cooperative nature and could minimize aspects of competition in economic activities. CBVS is chosen to complement the financial position statement because it could cover a historical-based balance sheet and has become a seminal work. However, Velayutham (2014) claims that the efforts of Baydoun and Willett (2000) and their proponents are unnecessary because, conceptually and practically, there is no difference between Islamic and Western accounting. Velayutham (2014) also postulates, citing the experimental results of Sulaiman (2001), which shows the evidence that ICRs did not work for both Muslim and non-Muslim practitioners in Malaysia. After nearly three decades of the AAOIFI conceptual framework (1993) and the criticism of Baydoun and Willett (2000), two revisions were made in 2010 and 2020 (AAOIFI, 2015). However, there has not been a resonant improvement in both substance and content in the form of financial statements. The change focuses more on consolidating the conceptual framework, including a separate statement, objectives of the Financial Accounting for Islamic Banks and Financial Institutions (Statements of Financial Accounting, SFA No. 1), and (2) concepts of the Financial Accounting for Islamic Banks and Financial Institutions, SFA No. 2 (AAOIFI, 2001), and the single Conceptual Framework for Financial Reporting by Islamic Financial Institutions (CFFR-IFIs) (AAOIFI, 2015). As a result, the AAOIFI conceptual framework becomes closer to WFASs. The main drawback of Baydoun and Willett‘s (2000) proposal is that the explored Islamic values are philosophical and reflective. Financial reports with a philosophical approach are academically strong but propose a weak practical guide. In contrast, Islamic values using the fiqh approach are more accepted and commonly used to test the sharia suitability for sharia transactions (‘aqd) in IFIs (Cerimagic, 2010; Choudhury, 2018, 2019; Rosly, 2010). Financial reports are also beneficial for sharia authorities at various levels to design and enact fatwas. Likewise, regulators at any level, including the accounting standard board, do not want their decisions to conflict with shariah authorities. 114 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin This article aims to examine three concepts of practical ethics originating from fiqh studies, which have strong roots in Islamic scholarship, specifically in the financial sector; these concepts are al kharaj bi al dhaman, maslaha, and nafaqa that substitute for the more philosophical basis of Baydoun and Willett‘s (2000) Islamic ethics. Moreover, this study aims to apply the three practical ethical concepts more technically to improve the structure and content of Baydoun and Willett‘s (2000) VAS. 2. Literature Review 2.1 Revisiting Islamic Corporate Reports According to Littleton, financial accounting, which leads to financial statements, is based on profit loss and statements of financial position in the Western tradition; this concept has been introduced since the 1600s and continues to evolve (Schroeder et al., 2011). Financial statements are central information as the final result of the accounting dialectic process. In the United States, SFAC No. 1 (FASB, 1978), for example, divides the elements of financial statements into assets, liabilities, revenues, expenses, etc. The SFAC No. 6 (FASB, 1985) states as follows. “The items in financial statements are represented in words and numbers, show certain entity resources, claims to those resources, and the effects of transactions, other events, and circumstances that change those resources and claims.” However, Baydoun and Willett (2000) consider that WFASs have two negative characteristics: (1) economic rationality based on psychological hedonism and Bentham's utility concept; and (2) individualism. Individual satisfaction becomes the ultimate goal, while maximizing results becomes a marker of success. Consequently, a social action could be directed to maximize quantifiable functions of utilizationconsumption and individualism. Natural selection, also known as survival of the fittest (social Darwinism), becomes a long-term strategy for interpersonal relationships and focuses on results without considering the holistic process and impacts on the environment. As a result, accounting systems and practices are only designed for individual accountability, requiring limited financial information disclosure. Baydoun and Willett (2000) argue that all these values and characteristics are similar to the secular Western philosophical orders, not Islam. Baydoun and Willett (2000) postulate their argument in Gambling and Karim’s (1986) article, which describes some impacts of the Islamic context on the design of accounting practices. Important religious values are in the form of (1) laws sourced from the Qur’an and Hadith; (2) minimum separation between the religious and worldly (secular) spheres; (3) priority to the community (ummah); (4) the prohibition of usury and its impact on Islamic business organization; and (5) specific disclosures for zakat schemes and other religious obligations. The last two sections are the focus discussion to develop the ICR’s draft. Baydoun and Willett (2000) assess the measurement method of the economic approach impractically due to two factors. First, the market value model does not explain which market to refer to (entry or exit value) and when to use the value. Second, the discounted cash flow models ignore future uncertainty. Therefore, ICRs are structured on a monetary approach by grouping invoice costs, historical importance, and economic activities based on the physical and legal input-output relationship. The expenses of unfinished activities refer to assets, and the cost of completed activities is equity or realized profit. According to Baydoun and Willett (2000), the monetary approach that consists of flow, transaction, or profit-loss is more congruent with Islam, because this approach does not depend on the time value of money. Therefore, this approach naturally provides a strategy to interpret the market value of assets without using unrealistic assumptions. However, Baydoun and Willett (2000) accept that zakat obligations and the distribution of proceeds in a mudharabah contract require information on the present values of assets. These considerations are based on the characteristics of historical details tied to the characteristics of a particular Islamic entity. Meanwhile, the 115 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin present market value reflects the expected value of the organization's assets from a broader perspective. Thus, present value information should be used to support the historical value information. Financial reports of AAOIFI have also added several features. For example, the statement of financial position is added with several IFI account types in the asset element as a consequence of using sharia transactions (‘aqd), such as receivable sales (muarabahah or istishna'), to accommodate debt-based financing. Accounts of mudharabah financing and musyarakah investment are derived from investment elements (AAOIFI, 2001). The enrichment also adds the equity element of unrestricted investment account holders between liabilities and owners’ equity (AAOIFI, 2001, 2015). The emergence of this account is intended to accommodate mudharabah and musyarakah transactions funded by a third party in the form of savings or deposits in Islamic banking. Furthermore, AAOIFI has introduced three iconic report types of IFIs: (1) statement of changes in restricted investments, (2) statement of sources and uses of funds in zakat and charity, and (3) statement of sources and uses of funds in qard. The lack of attention to information on externality aspects of the WFASs approach in economic measurement has been criticized for a long time. Deegan (2004), for example, mentions six weaknesses associated with the external aspects. First, the weakness seriously focuses on information about economic interest in the organization. Second, the “materiality” principle is difficult to quantify on social and environmental aspects. Third, financial statements generally discount liabilities that are not completed in several years and the future; thus, future expenditures, such as environmental rehabilitation costs, are less significant. Fourth, the adoption of entity assumption, which does not directly impact, should be ignored in the report. Fifth, expenses will be excluded if they are outside the company’s control. Sixth, the aspect of “measurability” as a various item is challenging to measure accurately. The idea of a corporate report is a response to traditional financial reports, which rely only on the internal organization's economic aspects. The corporate report departs from expanding the traditional public accountability concept, which involves only two parties: the agent and the principal. Perks (1993) proposes a new perspective of public accountability, which include: (1) the existing and potential equity of the investor group; (2) the existing and potential loan creditor group; (3) the analyst investor groups (i.e., financial analysts, economists, and statisticians); (4) the business contact group (i.e., customers, trade creditors, suppliers, and competitors); (5) the government (i.e., tax authorities), and (6) the public (i.e., taxpayers, ratepayers, consumers, other community and special interest groups). These six groups deserve to receive corporate information with value-added reporting, known as the VAS of Baydoun and Willett (2000). The VAS consists of two parts: (1) a section that presents the source of value-added and (2) a section that presents the value-added distribution. Baydoun and Willett (2000) realize that Islamic corporate reports should be made to focus on monotheism, community, and the environment as a form of social accountability. Therefore, full disclosure of the information is needed, not to disclose everything but any information that should be submitted to every community member and agrees with sharia principles. Moreover, this disclosure should not be based on the ease of information, such as the cost-benefit principle, but it must rely on moral considerations on the formation of community welfare, the requirement for the zakat payment, and the prohibition of usury. Baydoun and Willett (2000) direct that the contribution of value-added to all recipients reflects the commercial activities of Islamic business organizations, providing an expenditure function to create profit. VAS emphasizes the performance evaluation of Islamic business organizations based on their contribution to the community, rather than focusing on the entity's individualistic performance and directing each party's attention to the equitable distribution of financial results. Because income reports have the potential to distort awareness of Islamic values and only focus on one dimension of performance, Islamic business organizations must completely replace them with VAS for the good of the community. 116 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin 2.2 Sharia, Fiqh, and Relevant Concepts for Financial Reporting Islam, which means safe, is a complete teaching and covers the individual, communal, and whole aspects of life in the broadest sense. To regulate all of these aspects, Allah the Almighty delivered the Quran as the first and primary source of Islamic law; sunnah is the second source (Khadduri, 1961). Scholars cite the Quran and sunnah as primary sources while the secondary sources are from nass, such as consensus (ijma’), analogy (qiyas), interest (maslahah), juridical preference (istihsan), tradition/custom (al-urf), etc. (Auda, 2008). Sharia, means a way or walk in the springs. According to Fathi ad-Duraini, sharia is “everything that Allah the Almighty revealed to the Prophet Muhammad Peace Be Upon Him in the form of revelation of the Quran and the Sunnah of the Prophet SAW that are believed to be valid (shahih)” (Dahlan, 2006). The term sharia could also be interpreted into three concepts. First, sharia is the entire religion brought by the Prophet Muhammad. Second, sharia is the whole text of the Quran and Sunnah which have legal values derived from Allah’s revelation. Third, sharia refers to an expert’s understanding of the law that comes from Allah’s revelation and the results of ijtihad based on Allah’s revelation called fiqh (Ka’bah, 2004). In short, Islamic legal rules cover ethics and law as well as the world and the hereafter (Vogel & Hayes, 1998). However, it is emphasized that sharia should not be narrowed down to Islamic law. Sharia means the core of the Islamic view of life, constitutes a system of ethics and values, and functions as a methodology to solve present and future human problems (Sardar, 2004). Islamic law consists of two concepts: sharia (the divine law) and fiqh (human comprehension of that law) (Vogel & Hayes, 1998). Auda (2008) states that fiqh is “knowledge of practices which reveal ruling extracted from detail evidence.” The detailed evidence is sourced from the Quran and hadith (sunnah). Mazhab (school of Islamic jurisprudence) divides fiqh into Hanafi, Maliki, Shafi’, and Hambali. Fiqh also acts as a practical guide and and consists of two focuses: worship fiqh (prayer, fasting, zakat, and hajj) and and fiqh muamalah (social, economic, and financial). Vogel & Hayes (1998) appreciate the commercial fiqh for offering the expression of religious law in commercial life as a breakthrough to secular law, which is rarely questioned again. Commercial fiqh is seen as the capability of challenging secular law on two fronts at once. First, it is assumed that commercial law (conventional) is considered more efficient and superior. Second, there is a challenge to separate religion, piety, and commerce. This study employs three relevant concepts of commercial fiqh in the form of the financial statements of Islamic entities, namely maslaha, nafaqa and al kharaj bi al dhaman. 2.2.1 Maslaha The word maslaha is derived from the Arabic verb sha-la-ha or mash-la-hat, which means something that brings goodness. Meanwhile, Auda (2008) defines maslaha as interest, good, benefit, and utility. Rahim (2010) describes maslaha as an opportunity or goodness. Based on the script, maslaha is divided into three; maslaha supported by a script (mu'tabarah); free maslaha (mursalah), and maslaha not mentioned in or discredited by a script (muhdara) (Auda, 2008). Maslaha consists of three levels: elementary level (darurriyat), complementary level (hajjiyat), and embellished level (tahsiniyat). Essential level (darurriyat) includes efforts to guard: din (religion), nafs (life), maal (property), 'aql (intellect), and nasl (offspring). In practice, maslaha should not be directed only to the interests of individuals, groups, and the world in order to formulate genuine maslaha (Rahim, 2010). Al Thufi (of Hambali, Maliki, Hambali, and Ibadi) views the reception of jurists on maslaha legitimizes even if it contradicts the script. Meanwhile, Shafi’i, Hanafi, Shi’i, Zaydi, and Zahiri believe that maslaha contains invalidity as a source of law (Auda, 2008). However, Auda (2008) considers that all madhabs, except the Zahiri, implicitly and explicitly apply maslaha in their ijtihad. 117 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin Many accounting concepts are equivalent to modern Western accounting in the Quran. Askary and Clarke (1997) mention nine accounting concepts in the Quran; account in 39 surahs and 83 verses; assets in 17 surah and 49 verses; capital in 1 surah and 1 verse; credits 1 surah and 1 verse; measurements in 7 surah and 12 verses; liability in 7 surah 11 verses; records or book-keeping in 8 surah and 9 verses; relevance in 4 surah and 6 verses; and reliability in 11 surah and 9 verses. Because these concepts are still separated, one or two other concepts need the right methodology to aggregate Islamic accounting concepts and form a financial statement structure. The concept of maslaha has sufficient qualifications for the intended purpose. 2.2.2 Nafaqa Etymologically nafaqa means expenditures, costs, spending (Munawwir, 1997), and shopping. The early traditional Arabian life defines nafaqa as a basic need given by a husband to his wife, by a father to his children, and by relatives to his family. Baaqi (2007) explains that the Quran uses various verbs to describe nafaqa, in 63 verses, derived from the pattern (wazn) including issued or given property (infaq). Even though the text on nafaqa is rich, its mainstreaming is placed more as a personal expense because of descent/kinship (father, mother, child), marriage (wife), and ownership (livestock, servant/slave) (Bahri, 2015). However, nafaqa on ownership, including company ownership, is still very flexible. Consequently, all expenses in the company could be conceptually viewed as nafaqa. A company performs payment types for the internal parties, such as wages, salaries, and dividends, and for the external parties, such as taxes, social participation, and environmental development. These types of payments are still relevant to serve as nafaqa. Hence, expenditure becomes very religious and divine because it is supported by nass drawn from infaq and indicates obligation such as zakat, recommendation such as charity or infaq and permissibility such as gifts. The concept of nafaqa is equivalent to expenditure. It has been extensively used during the Mamluk Dynasty in Modern Egypt. Mujani (2012) has revealed two important costs that use nafaqa as expenditure: nafaqa safar including costs given to soldiers on the eve of military expeditions and nafaqa bay’a including costs for the succession of new rulers on the throne. Meanwhile, various expenditures for mundane routines comprise salaries received by individual employees, food, and clothing; these expenditures are not referred to as nafaqa. 2.2.3 Kharaj bi al Dhaman Ijtihad is an attempt by authoritative Islamic scholars (ulama) to derive divine laws sourced from the Qur'an and Sunna. Ijtihad uses a methodology known as the roots of the law (ushul fiqh) (Vogel & Hayes, 1998). Recently, scholars have drawn a line from previous scholars’ thoughts in the form of principles (Qawa'id) when facing new problems, for example, financial contracts. Qawa'id is a general rule of law (maxim) that is partly and directly found in the words of the Prophet (Vogel & Hayes, 1998). Kamali (n.d.) understands qawa’id as legal maxims (qawa'id al-kulliyah al-fiqhiyyah). A legal maxim is a theoretical abstraction, usually in the form of a short and expressive epithetical statement or a few words. Legal maxim contains the goals and objectives of the Shari’ah. The legal maxims of fiqh refer to main ideas that are derived from the detailed reading of fiqh rules in various themes (Kamali, n.d.) Kharaj bi al dhaman (cost-reflected earnings) is a principle that is widely used in commercial fiqh. This principle is usually combined with the principle of al-ghunmu bi al ghurmi (profit comes with risk or riskaccompanied benefit) (Anggraini et al., 2021). Kharaj bi al dhaman in finance is usually used to control risk management (Abdullah, 2022; Noor et al., 2018). 118 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin Studies 2.1 and 2.2 are summarized in Table 1 to show a comparison of values of WAFSs, Baydoun and Willett’s ICRs, and Maslaha-based ICRs. The concept is sharpened in a philosophical perspective that is not only in the oneness of God but also in the unity of the methodology. Moreover, the principle is communal and still respects individuality. Islamic teachings are sharpened on the criteria; Public accountability should be conducted by participants and affected parties in resource management. The unity of the methodology could be explained through a study of kharaj bi al dhaman, maslaha, and nafaqa (studies 2.2.1, 2.2.2, and 2.2.3) that provide practical ethics to shape and strengthen practical methodologies and principles. Thus, new forms Maslaha-based ICRs could be projected. Table 1. Comparison of Value-Based WFASs, ICRs, and Maslaha-Based ICRs Western financial accounting systems Characteristics Baydoun and Willett's ICRs Maslaha-Based ICRs Philosophical viewpoints Economic rationalism Unity of God Unity of God and ethodology Principles - Secular Individualistic Profit maximization Survival of the fittest Process Based on modern commercial and permissive law, rather than ethical law - Limited disclosure in providing information to the public interest - Religious Communal Reasonable profit Equity Environment Based on ethical law originated from the Quran, Islamic law and As-sunnah - Religious Individual & communal Maslaha profit Equity Environment Based on Islamic teaching: Qur'an, hadith, and ijtihad. - Full disclosure to satisfy any reasonable demand for information following the Sharia - Full disclosure to satisfy any reasonable demand for information following the Islamic teachings - Personal accountability focuses on individuals who control resources - - Public accountability focuses on the community that participates in the resource management - Public accountability focuses on the community that participates in managing the resources - Kharaj bi al dhaman, maslaha, & nafaqa Criteria Practical Ethics Source: Baydoun and Willett (2000), modified 3. Research Methodology This study employed a qualitative approach with secondary data. The initial data were from the ICR articles of Baydoun and Willett (2000) and the AAOIFI conceptual framework (2010 and 2020). The data were analyzed through three stages. First, we identified and analyzed the values that form the foundation of the WFASs adopted by AAOIFI from the articles of Baydoun and Willett (2000). At this stage, we revisited the substantive novelty in the structure and content of AAOIFI’s financial statements after two changes had been made in 2010 and 2020. This stage aimed to explore if they had resonated with the criticisms of Baydoun and Willett (2000). Second, we reexamined the main weaknesses of Baydoun and Willett’s (2000) argument in building ICRs, especially on VAS, to investigate the possibility of making VAS based on 119 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin maslaha. Third, we deeply examined the three concepts of fiqh; namely al kharaj bi al dhaman (cost-reflected earning), maslaha (goodness), and nafaqa (expenditure) as practical ethics to build Maslaha-based valueadded statements. 4. Results and Discussion 4.1 Maslaha-Based Value-Added Statement The form and content of financial statements are two matters of ijtihad (maslahah mursalah). Because financial statements are not found in the text (script), AAOIFI (2001, 2015) attempts to adopt WAFSs and adds certain features after eliminating various conflicting aspects, such as usury (interest) and paying zakat, which represents a legitimate effort (effort 1). Baydoun and Willett (2000) offer the VAS and CVBS as alternatives to AAOIFI’s financial statements, which is a worthwhile endeavor (effort 2). The business operation that uses the concept of maslaha (goodness) will be reported in the revenue account as Maslaha revenues to become Maslaha-VAS and in the concept of nafaqa (expenditure) as a substitute for expenses (attempt 1). The distribution (attempt 2) is an effort to find strong roots in sharia (script) to achieve maslaha mu'tabarah. The use of kharaj bi al dhaman (cost-reflected earnings) has a stronger sharia basis than WAFSs (Figure 1.b). 4.2 Maslaha Revenue According to the maslaha perspective, the maslaha revenue refers to all revenue from legal transactions and activities that do not violate the law and constitute halal and tayyib. Excluded from maslaha revenues if it is from illegal transactions for substances such as usury (interest), pornography (fahishah), gambling (maysir), and liquor (khamr). Moreover, maslaha revenues prohibit ways of obtaining goods or services if damaging the environment, destructing social harmonization, violating human rights, or committing bribery (risywah). All non-maslaha revenues must be directly offset to get net maslaha income. 4.3 Nafaqa To create a harmonious relationship, stakeholders should share the risks and costs from this perspective. Sharia exists to directly or indirectly moderate latent conflicts due to the human nature of being selfish between the holder and giver of the trust and between the community and the operating environment in the broadest sense. Nafaqa (expenditure) is employed as a substitute for expenses (AAOIFI) and distribution (ICRs), which are more accepted for religious accounting measurements and the history of Islamic civilization (see section 2.2). This concept requires the parties’ liability for issuing nafaqa (infaq) to those who are their responsibilities. Expenditures for Corporate Social Responsibility are also more flexible in the concept of nafaqa. Figure 1a Figure 1b Value-Added Statement Maslaha- Based Value-Added Statement Sources of value-added $ Maslaha revenues $ Revenues X Revenues and others X Bought-in items Revaluations (X) X Bought-in items and services Revaluations X (X) X X 120 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin Distributions Nafaqa (expenditures): Beneficiaries (e.g., zakat) X Employees (e.g., salary and wages) X Government (e.g., tax) X Management (e.g., salary) X Employees (e.g., wages) X Owners (e.g., dividend) X Owners (e.g., dividend) X Investment account holders (e.g., profit sharing) X Reinvest funds X Government (e.g., tax) X Profit retained (note) X Infaq (religious charities): X Revaluations X - Obligation (e.g., zakat) x X - Recommended (e.g., charity) x - Permissible (e.g., gifts) x Retain for reinvestment X X Source: Baydoun and Willett (2000), modified Maslaha could be incorporated with the VAS into Maslaha-based VAS by changing value-added sources into maslaha revenues and distributions into nafaqa. The use of the principle of kharaj bi al dhaman aims to substitute the matching concept and compose more maslaha performance reports on Islamic entities because the principle of kharaj bi al dhaman has strong vertical bounds to Allah the Almighty (hablumminallah) and horizontal bounds to humans (hablumminannas) and their surrounding environment. Moreover, the principle of kharaj bi al dhaman could connect humans to the aspects of the world and the afterlife aspects at once. 5. Conclusion The concepts kharaj bi al dhaman, maslaha, nafaqa could change the previously “secular” financial reports into being bound to sharia and humanistic reports. Thus, Maslaha-based VAS is more accepted by stakeholders, regulators, and ulama because it is based on a practical approach and could cover the weaknesses of VAS in Baydoun and Willett’s ICRs that are still based on a philosophical system. Moreover, Maslaha-based VAS could be a new alternative for the AAOFI version of the income statement (2001, 2015), which relies heavily on the concepts in WFASs and IFIs even though it is claimed to be based on the profit sharing concept (Hidayah et al., 2019). Maslaha-based VAS could empower social reporting and reports related to environmental issues (Kamla et al., 2006; Maali et al., 2006; Sulaiman & Willett, 2003). Therefore, Maslaha-based VAS could be a bridge and answer to the latest challenges of more macro accounting research, such as accounting research related to the United Nations Sustainable Development Goals (SDGs) (Bebbington & Unerman, 2020). Thus, this study implies that Maslaha-based VAS could become an alternative to the income statement for Islamic financial services and non-financial entities. Specifically, the structure and content of Maslaha-based VAS could concrete the form and scope of the integrated maqasidi financial report initiated by Birton et al. (2019). Future research could explore the maslaha-based ICRs to co-exist with sustainability reports and integrated reports. However, this article has a limited discussion of a replacement for the statement of financial position. As the Islamic accounting discipline grows, various proposals, particularly regarding financial reporting, will continue to be the subject of debate. Meanwhile, to be practical, financial reporting standards require other regulations by authorities in the jurisdiction aspects. Thus, good dialectics on the choice of values, 121 Acc. Fin. Review 7(2) 113– 123 (2022) M. Nur A. Birton, Mahfud Sholihin and Muhammad Muttaqin assumptions, and concepts that form a practical guide will be very useful for achieving maturity in this discipline. Acknowledgments This study is funded by the Ministry of Research and Higher Education, of the Republic of Indonesia, with contracts number 7/E/KPT/2019 and 109/SP2H/LT/DRPM/2019. References AAOIFI. (2001). 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