End-of-service gratuity is recorded as a liability that grows with each employee's service. Under IFRS it falls within IAS 19 on employee benefits. Many smaller UAE companies book a straightforward provision equal to the amount payable if all staff left on the reporting date, while larger groups may use an actuarial valuation.
Why it is a liability
Employees earn gratuity through service. At each year-end the company owes a part, even if nobody has left. Leaving it off the balance sheet understates costs and liabilities. For the entitlement rules see gratuity: limited vs unlimited contracts, resignation and termination.
Two common approaches
| Approach | How it works | Typical use |
|---|---|---|
| Simple accrual | Calculate what each employee would receive if they left on the reporting date; provide for the total | Small and medium companies |
| Actuarial valuation | Project the benefit to the expected leaving date, apply assumptions and discount to present value | Larger entities where the difference is material |
IAS 19 treats an end-of-service benefit as a defined benefit obligation in principle, which points to the actuarial method. In practice, many UAE companies use the accrual method where the result is not materially different. Agree the approach with your auditor, and note it in your accounting policies. If you report under IFRS for SMEs, see IFRS vs IFRS for SMEs.
Steps for the simple method
- List every employee with join date and last basic wage.
- Compute service to the reporting date, in years and fractions.
- Apply the formula: 21 days per year for the first five years and 30 days after, with the cap.
- Total the liability and compare with last year's balance.
- Book the movement, less payments made to leavers, to the profit and loss account.
Journal entries
| Event | Debit | Credit |
|---|---|---|
| Year-end provision increase | Staff cost: gratuity expense | Provision for end-of-service benefits |
| Payment to a leaver | Provision for end-of-service benefits | Bank |
| Overprovision release | Provision for end-of-service benefits | Staff cost |
Worked example
A company has the following liability at year-end: AED 120,000 at last year-end, payments of AED 18,000 to leavers during the year, and a recalculated liability of AED 150,000 at this year-end. The charge for the year is AED 150,000 minus AED 120,000 plus AED 18,000, which is AED 48,000. Debit staff costs AED 48,000, credit the provision AED 48,000. Then debit the provision AED 18,000 and credit bank AED 18,000 for the leaver payments, giving a closing balance of AED 150,000.
Disclosure
- Accounting policy for the method used.
- Opening balance, charge, payments and closing balance.
- Key assumptions where an actuarial valuation is used.
Corporate tax view
Check whether the expense is deductible on accrual or on payment under your elections and the Corporate Tax Law. See deductible expenses under UAE corporate tax.
What an auditor checks
- Employee list agrees to payroll.
- Basic wage and join dates are correct.
- Formula applied consistently.
- Payments agree to the final settlements.
- Policy and disclosure fit the framework used. See how to prepare for an annual audit.
Common mistakes
- No provision at all, with gratuity expensed only when paid.
- Using total pay instead of basic wage.
- Leaving out staff on leave or recently resigned.
- Not tying the provision to the payroll system.
Next step
If you have not reviewed your provision recently, run it before year-end. Our payroll and WPS services include gratuity accrual, and the gratuity calculator helps with single cases.
Examples of misstatement an auditor finds
| Issue | Effect |
|---|---|
| Provision based on total salary rather than basic wage | Liability overstated |
| Provision not updated for pay rises | Liability understated |
| Staff missing from the schedule | Liability understated |
| Payments to leavers charged to expense with no provision movement | Provision and expense misstated |
Cash method vs accrual
Some very small businesses record gratuity only when paid. That is not in line with accrual accounting under IFRS, and an auditor is likely to propose an adjustment. If you are close to a first audit, build the schedule now rather than waiting for the year-end.
Controls that keep it right
- Reconcile the schedule to payroll each quarter.
- Have HR confirm join and leave dates.
- Review the formula after any law change.
- Keep the workings with the year-end file.
Do you need to set cash aside?
The accounting provision is a liability, not cash. Some companies set aside funds in a separate account to meet settlements, but the law does not require a separate fund for private-sector gratuity in the way a pension scheme does. Decide based on cash flow.
Frequently asked questions
Yes. Employees earn it through service, so the company records a provision that grows each year.
IAS 19 covers employee benefits, and end-of-service benefits are treated as defined benefits in principle. Many smaller UAE companies use a simpler accrual where the difference is not material; agree the approach with your auditor.
For each employee, apply 21 days per year for the first five years and 30 days after, using the last basic wage, up to the cap, and total the amounts.
It depends on how deductions are timed under the corporate tax rules and your elections. Check with your tax adviser.
The employee list, wage and dates, the formula, payments to leavers and the disclosure.