Profit Distribution Mechanism (PDM) between the depositors and shareholders, is considered as one of the most critical functions of any Islamic Bank. Inaccurate PDM may not only lead to negative impact on the bank’s profitability but also can expose it to reputational and non-compliance risks. Banks must exercise utmost care when setting policies and procedures for PDM, following the principles of fairness and transparency. Islamic banks in UAE must also do so to ensure compliance with AAOFI’s Shari’ah Standards, a regulatory requirement introduced in 2018 by the Higher Shari’ah Authority (HSA) of the UAE Central Bank. Accordingly, this paper identifies discrepancies in the way Islamic banks in UAE have historically practiced PDM and the gaps that continue to exist in adoption and application of AAOIFI-compliant PDM. These gaps were identified after surveying and holding detailed meetings with relevant teams of Islamic banks in the UAE. Information gathered was calibrated further by authors using their own insightful understanding of PDM, as experienced Islamic banking practitioners themselves. Almost all the surveyed teams of Islamic banks felt that there was an inevitable need for an applied and simplified guide around AAOIFI-compliant PDM for use by all in the UAE. This paper, therefore, aims to serve that need as well by providing an applied but simple account of adoption and application of PDM by Islamic banks in accordance with AAOIFI Shari’ah standards. The proposed AAOIFI-compliant PDM guide may, therefore, serve as the reference resource for Islamic banks.