Islamic Financial 
Accounting Standard 
on Profit and Loss 
Sharing on Deposits 
 

The Institute of Chartered Accountants

Of Pakistan

January 2013

 
 
 
STANDARD ON PROFIT AND LOSS SHARING ON DEPOSITS

Preface

. This Standard aims at setting out accounting principles to be followed by Institutions offering
Islamic Financial Services (IIFS) for recognizing, measuring, presenting and disclosing the
transactions relating to equity (‘funds’) of unrestricted investment / (Profit/Loss Sharing) PLS deposit
account holders and their equivalents.
.
Statement of the Standard

1. Scope of the Standard

1.1 This Standard addresses two issues:

(a) First the accounting principles relating to funds received by the IIFS for investment
in its capacity as a mudarib at the IIFS's discretion, in whatever manner the IIFS
deems appropriate (funds of unrestricted investment account holders / PLS
deposit account holders); and

(b) Second, the disclosure of bases for profit allocation between owners' equity and
that of unrestricted investment / PLS deposit account holders as applicable to the
financial statements published by IIFS to meet the common information needs of
the users of such statements.

Explanation: This Standard is also applicable to funds received on profit and loss sharing
basis, such as export refinance from SBP unrestricted investment accounts /PLS deposit
accounts / funds obtained based on musharaka.

1.2 This Standard does not address the following:

(a) The funds received by the IIFS on a basis other than the Mudaraba and / or
Musharaka contract, for example:

• Funds received for investment on the basis of agency for a specified fee;
• Non remunerative cash margins and their equivalent;
• Non remunerative security deposits and their equivalent; and
• Current accounts and their equivalent based on qard.

(b) Bases of calculation of Zakat on funds of unrestricted investment / PLS deposit

account holders.

2. Definitions

2.1 Unrestricted investment accounts / PLS deposit accounts

2.1.1 Under this type of account, the investment account holder authorises the IIFS to
invest the account holder’s funds on the basis of Mudaraba or Musharaka
contract in a manner which the IIFS deems appropriate without laying down any
restrictions as to where, how and for what purpose the funds should be invested.
Under this arrangement, the IIFS can commingle the investment account holder’s
funds with its own equity or with other funds the IIFS has the right to use with the
permission of Investment account holders (e.g. current accounts or any other
funds which the IIFS does not receive on the basis of Mudaraba or Musharaka
contract).
 2.1.2 Funds of unrestricted investment / PLS deposit account holders and their equivalent
refer to the balance, at the date of the statement of financial position / balance
sheet, from the funds originally received by the IIFS from the account holders plus
(minus) their share in the profits (losses) and decreased by withdrawals or
transfers to other types of accounts.

2.1.3 Certificates of investment, term deposit receipts, redeemable capital and other
accounts of similar nature are equivalent to unrestricted investment / PLS deposit
accounts. These are issued by the IIFS in the names of those who subscribe to
them on the basis that the IIFS will use those funds to finance its investment
activities.

2.1.4 Profits are allocated between holders of such instruments and the IIFS, based on
the relative amount of funds invested by each in the respective pool and preagreed
profit distribution weightages / ratios, after the IIFS has received its share of profits
as a Mudarib. Losses are allocated between the IIFS and holders of these
instruments based on the relative amount of funds invested by each.

2.1.5 Funds of unrestricted investment / PLS deposit account holders and their equivalent
are to be considered as redeemable capital for the purpose of financial accounting
and reporting. This is because the IIFS is not obligated in case of loss to return the
original amount of funds received from the account holders unless the loss is due
to negligence, misconduct or breach of contract. Current accounts and other non-
investment accounts are guaranteed by owners' equity and not by the funds of
unrestricted investment / PLS deposit account holders or their equivalent.

2.2 Agency based contract for investments

2.2.1 Holders of investment accounts appoint IIFS to invest their funds on the basis of
an agency contract in return for a specified fee or a specified fee and share of the
profit if the realised profit exceeds a certain level, the latter being an incentive for
the IIFS to achieve a return higher than expected.

2.3 Mudaraba

2.3.1 Mudaraba is a partnership in profit whereby one party provides capital ( rab al maal)
and the other party provides labour (mudarib).

Explanation: Mudarib may also contribute capital with the consent of the rab al maal.

2.4 Musharaka

2.4.1 Relationship established under a contract by the mutual consent of the parties for
sharing of profits and losses arising from a joint enterprise or venture.

2.5 Return on unrestricted investment accounts / PLS deposit accounts and their
equivalent

2.5.1 Return on unrestricted investment accounts / PLS deposit accounts and their
equivalent is the share allocated to the holders of those accounts out of investment
profits and losses as a result of their participation jointly with the IIFS, in the
financing of investment transactions during the period covered by the income
statement.
 2.6 Profit / loss sharing period (the period)

2.6.1 Profit / loss sharing period (the period) of IIFS shall be the period for which an IIFS
computes, distributes / allocates profits / losses to its unrestricted investment / PLS
deposit account holders and the IIFS.

2.7. Redeemable Capital

2.7.1 The expression ‘redeemable capital’ for the purposes of this Standard means funds
or deposits received from unrestricted investment account holders / PLS deposit
account holders by IIFS on profit / loss sharing basis and subject to such terms and
conditions as may mutually be agreed between the IIFS and such account / deposit
holders.

3. Accounting treatment in respect of unrestricted investment account holders / PLS

deposit account holders

3.1 Funds of unrestricted investment / PLS deposit account holders and their
equivalent

3.1.1 Funds of unrestricted investment / PLS deposit account holders shall be

recognised when received by the IIFS. IIFS may maintain more than one pool to
finance its investments activities. In case the IIFS makes it a condition that the funds
will not be invested before a certain date, then the funds received shall be recorded
in a current account until their date of investment is due.

3.1.2 Funds of unrestricted investment / PLS deposit account holders shall be measured
by the amount received by the IIFS at the time of contracting.

3.1.3 At the end of the period, funds of unrestricted investment / PLS deposit account
holders shall be computed as follows:

Balance of investment account at the beginning of the period

Add: Any further deposits
Less: Any withdrawals
Add: Any share of profits allocated and reinvested
Less: Any share of losses allocated
Add / less: Any other necessary adjustment.

3.2 Allocation and accounting treatment of profit / loss

3.2.1 Profits of investment(s) jointly financed by the IIFS and unrestricted investment /
PLS deposit account holders shall be allocated between them according to the
mutually agreed terms.

3.2.2 Allocated but unpaid profits which are not reinvested as per mutual agreement shall
be recognised and disclosed as a liability by the IIFS.

3.2.3 Loss resulting from transactions in a jointly financed investment should, in the
first instance, be deducted from any unallocated profits / 1Profit Equalization
Reserve on the investment. Any loss remaining should be deducted from

1
Islamic Financial Services Board (IFSB) 1 Guiding Principles of Risk Management for Institutions (Other than Insurance Institutions)
offering only Islamic Financial Services

Profit equalisation reserve (PER) is the amount appropriated by the IIFS out of the Muḍāraba income, before allocating the
Muḍārib’s share, in order to maintain a certain level of return on investment for IAH and to increase owners’ equity.
 provisions for investment losses / 2Investment Risk Reserve set aside for this
purpose. The remaining loss, if any, should be deducted from the respective
equity shares in the joint investment of the IIFS and the unrestricted investment /
PLS deposit account holders, according to each party’s investment for the period.
For the purposes of this paragraph, the amount of investment shall be determined
by the IIFS under its policy for allocation of profit / loss.

3.2.4 Loss due to negligence, misconduct or breach of contract on the part of the IIFS,
based on the opinion of authority, as prescribed by applicable law/regulations,
shall be deducted from the IIFS’s share in the profits of the jointly financed
investment. In case the loss exceeds the IIFS's share of profits, the difference
should be deducted from its equity share in the joint investment, if any, or
recognized as due from the IIFS.

4. Presentation and disclosure in financial statements

4.1 Unrestricted investment accounts / PLS deposit accounts

4.1.1 Funds of unrestricted investment / PLS deposit account holders shall be presented
as redeemable capital.

4.1.2 The financial statement shall disclose in the note on significant policies of:

 the bases applied by the IIFS in the allocation of profits between owners'
equity and unrestricted investment / PLS deposit account holders;

 the bases applied by the IIFS for charging expenses to unrestricted

investment / PLS deposit accounts; and

 the bases applied by the IIFS for charging provisions, such as provision
for non performing accounts, provisions on impairment etc and the
parties to whom they revert once they are no longer required.

4.1.3 Disclosure should be made, in the notes on significant category of accounts and of
the percentage thereof which the IIFS has agreed with them to invest in order to
produce returns for them.

4.1.4 Disclosure should be made either in the notes to the financial statements or a
separate statement forming part thereof:

 of the total administrative expenses charged to unrestricted investment /

PLS deposit accounts along with a brief description of their major
components;

 minimum and maximum percentages / weightages for profit allocation

between owner's equity and various unrestricted investment / PLS deposit
account holders which the IIFS has applied in the current financial period.
When the IIFS has a number of different types of unrestricted investment /
PLS deposit accounts involving different contractual conditions, the
required disclosure applies to such type of accounts only when the total
amount thereof is of material significance;

2
Investment risk reserve is the amount appropriated by the IIFS out of the income of IAH, after allocating the Muḍārib’s share, in
order to cushion against future investment losses for IAH.
  of the percentage(s) of profit charged by the IIFS as a Mudarib during the
financial period;

 whether the profit if any, resulting from investment of current account funds
or any other funds not received by IIFS on the basis of Mudaraba /
Musharaka has been included or not, for determining allocation of profit to
unrestricted investment / PLS deposit account holders. In the event of
allocation, disclosure should also be made of the bases for such allocation;

 of whether the IIFS is sharing revenue from banking operations (e.g. fee
and commission income etc.) with unrestricted investment / PLS deposit
accounts. If so, the types of such revenue and the bases applied should be
disclosed; and

 in cases where the IIFS is unable to utilise all funds available for
investment, the two parties (owners' equity or unrestricted investment /
PLS deposit account holders) given priority therein.

4.2 Incentive profits, such as Hiba

4.2.1 Disclosures should be made of the bases and the aggregate amounts, where
applicable:

 for determining the incentive profits which IIFS receives from the profits of
unrestricted / PLS deposit accounts; and

 for determining the incentive profits which IIFS pays from its profits to
unrestricted investment/ PLS deposit accounts.

4.3 Disclosure of concentration of sources of unrestricted investment / PLS deposit

accounts

4.3.1 Disclosure should be made in the financial statements of the aggregate balances of
all unrestricted investment / PLS deposit accounts and their equivalent classified as
to type and also in terms of local and foreign currency.

4.4 Disclosure of maturity profile

4.4.1 Disclosure should be made in the financial statements of the aggregate unrestricted
investment / PLS deposit accounts and their equivalent and other accounts, by
type, in accordance with their contractual periods of maturity remaining
unexpired as of the Balance Sheet date. Maturity periods should be consistently
used and changes in the maturity periods used by the IIFS should be disclosed.

4.5 Classification of assets on the basis of sources of finance

4.5.1 Disclosure should be made in the notes to the financial statements in respect of
sources of financing of material classes of assets showing separately those:

(a) exclusively financed by unrestricted investments / PLS deposit account

holders;
(b) exclusively financed by IIFS; and
(c) jointly financed by IIFS and unrestricted investments / PLS deposit account
holders.
 4.5.2 The rights, conditions and obligations of each class of unrestricted investment
accounts / PLS deposit accounts and their equivalent and other deposit accounts
shown in the statement of financial position / balance sheet should be disclosed.

4.5.3 Separate disclosures shall be made of all material items of revenues, expenses,
gains and losses classified under the headings appropriate to the IIFS
distinguishing those attributable to:

a.) unrestricted investments / PLS deposit accounts ;

b.) IIFS; and
c.) IIFS and unrestricted investments / PLS deposit account holders jointly.

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