What is Gratuity Accounting?
Gratuity accounting is the process of measuring, recognising, and disclosing the liability for end-of-service benefits owed to employees under IAS 19. The liability is built up over the employee’s service period rather than expensed at termination.
How It Works
- Project the expected benefit at termination using the salary growth assumption.
- Discount the projected benefit back to the reporting date using a high-quality bond rate.
- Allocate the present value across the service period using the projected unit credit method.
- Recognise service cost in P&L and remeasurements (actuarial gains and losses) in OCI.
- Disclose the assumptions and sensitivity in the notes to the financial statements.
Saudi Context
Saudi entities reporting under IFRS as adopted by SOCPA must engage an actuary or use approved actuarial software to measure the end-of-service benefit liability. ZATCA accepts the actuarial expense as a deductible expense for income tax and zakat purposes within the limits of the regulations.
Example
A company has 100 employees with an estimated total projected ESB of SAR 8 million at retirement, discounted to SAR 5 million today. Current-year service cost is SAR 600,000 booked to P&L and SAR 200,000 of remeasurement gain to OCI.