AAOIFI FAS 45, 46 and 47 explained: what changes for Islamic banks

Investment accounts have always been the awkward line in an Islamic bank’s accounts. The holder shares in profit and, in principle, in loss, so the account is not a deposit in the conventional sense.

Yet the holder does not own the bank either, so the account is not equity. For years institutions presented these funds in different ways, and readers comparing two Islamic banks often could not tell whether they were looking at the same thing.

AAOIFI’s answer is a set of three financial accounting standards whose English versions were issued in December 2023 and which apply to financial periods beginning on or after 1 January 2026: FAS 45 Quasi-Equity (Including Investment Accounts), FAS 46 Off-Balance-Sheet Assets Under Management and FAS 47 Transfer of Assets Between Investment Pools.

They are read together with FAS 44 Determining Control of Assets and Business, issued at the same time. This guide explains what each one covers, why control comes first, and what the package means for profit distribution and Sharia governance.

Control comes first: FAS 44#

Before an institution can classify an investment account or describe a managed pool, it has to answer a prior question: does it control the assets the funds are invested in? FAS 44 sets how control of assets and of businesses is assessed.

Where the institution controls the underlying assets, they belong on its balance sheet and the funds that finance them are presented there too. Where it manages assets on behalf of others without controlling them, the assets sit off the balance sheet and FAS 46 applies.

The assessment is a matter of judgement on facts, and the indicators do not always point the same way. A restricted investment account where the holder directs the investment looks very different from an unrestricted pool the bank invests at its discretion, and arrangements in between are where the hard calls sit.

FAS 45: quasi-equity and investment accounts#

FAS 45 sets the reporting for quasi-equity: participatory instruments that are neither liabilities nor owners’ equity, of which unrestricted investment accounts are the most familiar example. Together with FAS 46, it supersedes FAS 27 Investment Accounts. It covers which instruments qualify, how they are presented between liabilities and owners’ equity, how they are measured and how profit is allocated to them, and the disclosures holders now receive.

FAS 46: assets managed off the balance sheet#

FAS 46 covers assets that an institution manages but does not control: recognition and derecognition, the choice of accounting policies, measurement, impairment and onerous commitments. It gives off-balance-sheet arrangements such as many restricted investment accounts a defined place in the financial statements, so that a reader can see what the institution manages for others and on what terms, even though the assets are not its own.

FAS 47: transfers between investment pools#

Islamic banks typically run several pools: assets funded by owners’ equity, assets funded by quasi-equity and assets managed off the balance sheet. When an asset moves from one pool to another, the profit each group of investors receives can change. FAS 47 sets the reporting and disclosure for those transfers, requires consistent accounting policies across pools in line with Sharia principles, and supersedes FAS 21.

Because a transfer between pools can move profit from one group of investors to another, the disclosure is a fairness question as much as an accounting one.

What it means for profit distribution and Sharia governance#

Taken together, the standards make visible decisions that used to stay inside the treasury and finance teams: which assets were allocated to which pool, how profit was allocated to investment account holders, and what moved between pools during the year. That matters to three readers.

Investment account holders can compare what they were told with what happened. External auditors need evidence for the control and classification judgements. And the Sharia supervisory board, with internal Sharia audit, has to be satisfied that the allocation and the transfers respect the contracts and Sharia principles.

Where institutions go wrong#

• Treating FAS 45 as a relabelling of FAS 27. The classification depends on the control assessment and the terms of each product, not on the old line name.
• Settling control product by product without a consistent rationale, so that similar accounts end up on and off the balance sheet.
• Recording pool transfers in treasury systems without the reasons, so the disclosure cannot be supported when the auditor or the Sharia board asks.
• Bringing the Sharia supervisory board in at the end, when the judgements are already in the accounts being prepared.
• Forgetting product terms and customer communications that describe the old treatment.

What to settle now#

1. Document the FAS 44 control assessment for every investment account product and managed arrangement, with the indicators considered.
2. Map each product to quasi-equity, off-balance-sheet management or another category, and record the reasoning.
3. Set out the pools, the allocation rules and the policy for transfers between them, and make sure every transfer leaves a record of why it happened.
4. Agree with the Sharia supervisory board and internal Sharia audit which judgements they review and on what evidence.
5. Compare the resulting disclosures with peer institutions before the first full year is published.

The AAOIFI Standards Update for Islamic Banks gives finance, Sharia, audit and product teams two days on these judgements, from control to pool transfers, with FAS 48 and FAS 49 alongside. For the governance side of the same questions, the Sharia Governance, Audit & Compliance programme covers how the Sharia supervisory board and internal Sharia audit test what finance decides.