Actuarial Valuation of End of Service Benefit under IAS 19 in Saudi Arabia

Introduction 

Employee benefits concepts in particular, End-of-Service Benefits (EOSB) have gained so much popularity in recent years around the worldincluding in Saudi Arabia with increased focus on corporate governance, financial transparency and compliance with International Accounting Standards.Valuation and reporting of EOSBs according to IAS 19 has become an essential process for organizations operating in the state.

This blog explores the important aspects of service benefit plan termination, IAS 19, plan requirementsand disclosure standards required to ensure compliance with international standards.

What is an End of Service Benefit (EOSB) Plan?

End of Service Benefit means all the benefits (whether monetary or non-monetary) the employee is eligible to receive at the end of their service towards the employer.These benefits act as rewards based on the employee's length of serviceand are often mandated by law in different jurisdictions.

End of Service Benefits in Saudi Arabia

In Saudi Arabia, The Labour Law specifies the rules for the EOSB.Employers are obliged to pay financial compensation to employees based on their length of service and last paid salary.

Key features include: 

Qualifications: EOSB applies to employees upon termination, resignation, or retirement.

Calculation: 

During the first five years of employment: half monthly salary per year

After five years: Full monthly salary for each additional year of work.Voluntary resignations will be adjusted according to specified criteria.

Applicability: 

Covers foreigners and local employees: Except for specific exceptions. 

EOSB represents a significant financial obligation for employers and requires careful calculation and reporting to ensure compliance.

What is IAS 19?

International Accounting Standard 19 (IAS 19) is a part of IFRS framework that describes the accounting for all types of employee benefits. 

IAS 19 requires organisation to recognise:

A liability when an employee has provided service in exchange for employee benefits to be paid in the future.

An expense when the entity consumes the economic benefit which arises from the service provided by an employee in exchange for employee benefits.

Objectives of IAS 19

It provides clear guidance on how to measure employee benefits. It ensures comparability of financial statements between organizations. It accurately explains the responsibilities of employers in relation to the interests of their employees.

Key Highlights of IAS 19

Understanding the principles of IAS 19 is essential for accurate EOSB valuation and reporting. Here are the basic points: 

1. Defined Contribution Plans vs. Defined Benefit Plans: 

IAS 19 differences between: 

Defined Contribution plan: The employer's obligation is limited to a fixed donation without any additional liability. 

Defined Benefit Plan: The employer guarantees specific benefits causing long-term debt. 

EOSB in Saudi Arabia is framed in a defined benefit plan.It requires actuarial valuation to accurately measure liability.

• Actuarial Valuation and Assumptions:

Actuarial Valuations are important in measuring defined benefit obligations (DBOs).

This involves:

Projected Credit Unit Method: A method for estimating the present value of future obligations based on years of service and salary progression.

Main assumptions:

Discount Rate: Reflects the current market yield on high quality securities.

Salary Growth Rate: The expected future increase in salaries.

Employee turnover rate: The probability that an employee will leave the organization before the end of their employment.

Demographic Assumptions: Mortality, livelihood and other factors.

•  Proactive planning

If the EOSB plan is funded (e.g., through outside funds), the fair value of the two plan assets must be offset against the BOD to calculate liabilities or liquid assets.

•  Presentation in the Financial Statements

• Liquid liabilities (DBO-plan assets) are shown on the balance sheet.
• Service costs and liquidity costs are reported in the results demonstration.
• Measurements are revealed in OCI (Other Comprehensive Income).

• Recognition of Expenses: Under the IAS 19, the following expenses must be shown:

• Service Cost 

• Net Cost of Finance

Disclosure Requirements under IAS 19

Transparency and comparability are fundamental to IAS 19, which requires detailed disclosure of employee benefits. For EOSB, organisations in Saudi Arabia must have the following:

1. Narrative description

• Characteristics of the plan (EOSB is a defined benefit plan)
• Legal and regulatory framework governing EOSB in Saudi Arabia

2. Reconciliation of obligations

Reconciliation of the beginning and ending balances of the defined benefit obligations is required. 

3. Assumptions

Disclosures should include:

Main actuarial assumptions used in the evaluation (discount rate, salary increase rate turnover rate)

Sensitivity analysis shows the impact of these location changes.

4. Financial Agreement

If you plan to receive a grant, disclose:

Fair value of assets

Investment strategy and risks involved in planning

5. Expense Division

Details of all recognized expenses include:

• Cost of service
• Net Interest Cost
• Components recognized by OCI

6. Risk

Discuss key risks associated with the plan, such as:

Financial Risk: Changes in the discount rate or inflation.

Demographic risks: Variation in employee turnover or longevity.

Conclusion

Assessing end-of-service benefits according to IAS 19 is an important process for organizations operating in Saudi Arabia. Guaranteed compliance with international standards, Accurate financial reporting and strong risk management are challenging, but implementing best practices, Take advantage of the actuarial experience and clear record keeping by officials can help in improving the process.

For these companies, Compliance with IAS 19 is not just about completing regulatory frameworks. It is also about demonstrating financial transparency and discipline in a highly competitive global market. By understanding and applying the principles of IAS 19, employers in Saudi Arabia can better manage their EOSB obligations and promote trust with their stakeholders.

Frequently Asked Questions

1: What are the EOSB rights in Saudi Arabia?

 All employees, including foreigners and local employees Eligible for EOSB unless not eligible by specific law or contractual agreement.

2: How do you control end-of-service benefits in Saudi Arabia?

Saudi labour law requires an EOSB, which describes qualifications, Calculation conditions and payment made.

3: What happens to the EOSB if an official voluntarily resigns?

Adjustment of EOSB upon resignation based on time of service:

Less than 2 years: NO EOSB

2-5 years: one-third of the calculated value

5 to 10 years: two-thirds of the value

Above 10 years: full EOSB

4 What is remeasurements?

The difference between actual and expected outcomes, these are recorded under OCI.