Takaful under IFRS 17

Takaful is Islamic insurance: participants protect each other through a shared fund, and the company running it earns fees rather than underwriting profit. That changes who bears the risk and so who reports what. This guide works through a takaful fund's year, explains the wakala and mudaraba models, and sets out how IFRS 17 and AAOIFI's FAS 43 apply.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

Takaful accounting reflects a structure unlike conventional insurance: participants contribute to a participants' takaful fund (PTF) that pays claims, while a takaful operator manages the fund for a wakala fee and often a mudarib share of investment profit. Surpluses in the fund belong to participants; deficits are covered by an interest-free loan, qard hasan, from the operator. Where IFRS applies, takaful contracts fall under IFRS 17, with judgement on who issues the contracts. Where AAOIFI standards apply, FAS 43, effective from 1 January 2025, sets the rules. In this guide's example, a fund with 1,000 of contributions has a surplus of 128 in one year and a deficit of 92 in a worse one.

At a glance

Fund
Participants' takaful fund
Operator earns
Wakala fee, mudarib share
Surplus
Belongs to participants
Deficit
Qard hasan from the operator
IFRS
IFRS 17, with issuer judgements
AAOIFI
FAS 43, effective 2025
Takaful under IFRS 17Fund: Participants' takaful fund; Operator earns: Wakala fee, mudarib share; Surplus: Belongs to participants; Deficit: Qard hasan from the operator; IFRS: IFRS 17, with issuer judgements; AAOIFI: FAS 43, effective 2025.KEY FACTS AT A GLANCETakaful under IFRS 17FundParticipants' takafulfundOperator earnsWakala fee, mudarib shareSurplusBelongs to participantsDeficitQard hasan from theoperatorIFRSIFRS 17, with issuerjudgementsAAOIFIFAS 43, effective 2025Tax BakersTakaful under IFRS 17Fund: Participants' takaful fund; Operator earns: Wakala fee, mudarib share; Surplus: Belongs to participants; Deficit: Qard hasan from the operator; IFRS: IFRS 17, with issuer judgements; AAOIFI: FAS 43, effective 2025.KEY FACTS AT A GLANCETakaful under IFRS 17FundParticipants' takaful fundOperator earnsWakala fee, mudarib shareSurplusBelongs to participantsDeficitQard hasan from the operatorIFRSIFRS 17, with issuer judgementsAAOIFIFAS 43, effective 2025Tax Bakers
Key facts at a glance, as set out in this guide.

Takaful accounting: a year in the participants' fund

Participants contribute 1,000 to a general takaful fund. The operator takes a wakala fee of 25% of contributions and a mudarib share of 30% of the fund's investment profit of 40. The fund pays re-takaful costs of 50.

Participants' fund in the good yearParticipants' fund in the good year1,000Contributions-250Wakala fee+28Net investmentprofit-600Claims-50Re-takaful128Surplus
The surplus belongs to participants, not the operator.
Participants' takaful fundClaims of 600Claims of 820
Contributions1,0001,000
Wakala fee to the operator(250)(250)
Investment profit less mudarib share2828
Claims(600)(820)
Net re-takaful cost(50)(50)
Surplus or deficit128(92)

In the good year, the surplus is distributed to participants, or part retained in the fund as a reserve, according to the fund's rules. In the bad year, the operator lends the fund 92 as qard hasan, repayable only from future surpluses. The operator's own income in both years is the same: the wakala fee of 250 and the mudarib share of 12, less its own expenses.

What are the wakala and mudaraba models?

  • Wakala: the operator acts as agent for the participants and earns a fee, usually a percentage of contributions, sometimes with a performance incentive linked to the surplus.
  • Mudaraba: the operator manages the fund's investments and shares in the profit, not the losses.
  • Hybrid: most operators use wakala for underwriting and mudaraba for investments, as in the example.

How does IFRS 17 apply to takaful?

Takaful contracts transfer significant insurance risk, so where IFRS is applied they are within IFRS 17. The main judgements are:

  • Who issues the contracts: many operators conclude that, in substance, they issue the contracts and present the participants' fund within their own financial statements, because they manage it and must support it with qard hasan.
  • Surplus distributions: expected distributions to participants are part of the fulfilment cash flows, so the fund's expected surplus does not become the operator's profit.
  • Qard hasan: in the operator's own results, a loan to the fund that is assessed for recoverability; where the fund is presented with the operator, it is an internal balance and the deficit is the combined entity's loss.
  • Measurement model: general takaful usually uses the premium allocation approach; family takaful with investment accounts may use the general model or the variable fee approach.

What does AAOIFI FAS 43 require?

In jurisdictions that require AAOIFI standards, such as Bahrain, FAS 43 Accounting for Takaful: Recognition and Measurement applies from 1 January 2025, with FAS 42 on presentation and disclosure. It covers takaful arrangements under a general or variable fee approach and a simpler contribution allocation approach, re-takaful held by the participants' fund, and accounting for the operator, drawing on IFRS 17's building blocks while keeping the participants' fund and the operator distinct.

What do takaful operators disclose?

Separate information for the participants' fund and the operator, the basis of the wakala fee and mudarib share, the surplus distribution policy and the amounts distributed, qard hasan balances and their recoverability, and the role of the Shari'ah supervisory board in approving the arrangements.

How is family takaful different?

Family takaful combines protection with savings: part of each contribution goes to a participants' investment fund held for each participant, and part to the risk fund as a donation, tabarru'. The investment element may be a separate investment component, excluded from takaful revenue.

Where to go next

See Islamic banking under IFRS, the premium allocation approach and insurance accounting under IFRS 17.

Need help applying the standards?

Our Chartered Accountants help finance teams and students apply IFRS and US GAAP to real transactions.

Book a call Chat on WhatsApp

Questions people ask

What is takaful accounting?

Accounting for Islamic insurance, where participants contribute to a participants' takaful fund that pays claims, and an operator manages it for fees.

Does IFRS 17 apply to takaful?

Yes, where IFRS is applied, because takaful contracts transfer significant insurance risk; the main judgement is who issues the contracts.

What is qard hasan in takaful?

An interest-free loan from the operator to cover a deficit in the participants' fund, repayable from future surpluses.

What is AAOIFI FAS 43?

AAOIFI's standard on accounting for takaful recognition and measurement, effective from 1 January 2025, used where AAOIFI standards are required.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IFRS 17 Insurance Contracts
  2. AAOIFI: FAS 43 Accounting for Takaful: Recognition and Measurement

Rules and fees change. If you are reading this long after October 7, 2026, confirm the figures with the source before you rely on them.

InsuranceInsurance accounting: IFRS 17 in practiceBankingIslamic banking products under IFRSInsuranceThe premium allocation approach

More in Insurance

Previous in this topicIFRS 17 disclosuresNext in this topicInsurance KPIs and the combined ratioTopicAll 13 guides in Insurance

This guide is general information. It is not tax or legal advice for your situation.