End of Service benefit benefit in Gulf Cooperation’s Council (GCC).
End of Service benefit is a monetary payment eligible to an employee as a lumpsum at the end of his tenure. End of Service benefit payment is a liability to the employer which accrues as the employee service period progresses.
The Gulf Cooperation’s Council (GCC) is a political and economic union of Arab states bordering the Arabian Gulf. It was established in 1981 and its 6 members are the United Arab Emirates, Saudi Arabia, Qatar, Oman, Kuwait and Bahrain. In accordance with GCC country’s labor law, all expatriate workers are entitled for End of Service benefit payment. Each GCC country has their own policies and procedure in settling the worker’s End of Service benefit payment. This article helps you to understand valuing of end of service liability and the comparison of end of service payment between the GCC countries.
International Accounting Standard No 19 Revised (IAS 19R) a part of IFRS framework that prescribes the accounting treatment of employee benefits. IAS 19R requires entities to perform actuarial valuation to determine the present value of its obligations in respect of End of Service benefit and other employee benefits. It also requires to recognise an expense in respect of employee benefit schemes.
An important concept in IAS 19R is to recognise the cost of providing employee benefit in the period when it is earned by the employee, rather than when it is paid or becomes payable. An actuarial valuation needs to be carried out using a Projected Unit Credit (PUC) method using an agreed set of financial and demographic assumptions that are based on the actuary’s best estimates.
An entity shall use the projected unit credit method to determine the present value of its defined benefit obligations and the related current service cost and, where applicable, past service cost.
The projected unit credit method requires an entity to attribute benefit to the current period (in order to determine currentservice cost) and the current and prior periods(in orderto determine the present value of defined benefit obligations). An entity attributes benefit to periods in which the obligation to provide post-employment benefits arises. That obligation arises as employees render services in return for post-employment benefits that an entity expects to pay in future reporting periods. Actuarial techniques allow an entity to measure that obligation with sufficient reliability to justify recognition of a liability.
To ascertain the actuarial liability there are some assumptions to be made namely Salary escalation rate (the rate at which the salaries of the employees are expected to rise), Attrition/Withdrawal rate (the rate at which the employees leave the company) and the Discount rate.
Once the valuation is complete, then not only Present Value of Obligation (liability number/provision amount) and expense number is important, but also how the numbers react with change in assumptions, the current liability (Liability to be paid within next 12 months) and the evaluation on past assumptions is also necessary.
IAS 19(R) standard demands for following disclosures other than the Liability and Expense numbers.
Mithras, One Stop to all actuarial solutions, is an actuarial consultancy providing its clients with all types of Employee benefits valuation under IFRS including End of Service Benefit (EOSB), Leave valuations, Pensions and others covered under IAS19 R. We have vast experience in ESOB valuation in GCC countries.
Actuarial Valuations are nothing but ascertaining the liabilities keeping in mind the past experiences and future expectations. There are certain factors on which an actuarial valuation depends. Data and Assumptions are the two main factors that are not in our hand and are client specific. What we do is to eliminate all the possible errors from the data. The other two factors which are Mithras USP are Number analysis and Disclosures. We make sure that the liability numbers from the previous year are consistent with current year liability numbers. Our reports provide all the necessary disclosures required as per ‘IAS 19R’ and are user friendly.
All the valuations are point specific and based on employee level. One can observe the contribution of each employee in the actuarial liability.
We are a team of individuals, who are dedicated and trained to provide clients the best assistance and guidance of the regulatory framework, measuring and optimizing liability and solving all the client queries related to valuation.
Ser-Past Service, ESB Sal- Last drawn salary at which End of Service benefit is payable.
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