End of Service Benefit (EOSB): Calculation Method and Accounting Treatment (According to Labor System and IAS 19)
End of Service Benefits (EOSB): Calculation Method and Accounting Treatment
It’s not just a “bonus” at the end of the road; it’s a deferred liability accumulating every month. End of Service Benefits (EOSB) represents a significant obligation for companies in the Gulf and Middle East. In this guide, we explain how to calculate the provision according to Labor Law (Standard Rules) and how to account for it under IAS 19 (Employee Benefits). We also provide an interactive calculator to estimate the liability instantly.
- Definition of End of Service Benefits (EOSB) and its legal basis.
- Calculation Rules (Labor Law context): Half salary for the first 5 years, Full salary thereafter.
- Accounting under IAS 19: Defined Benefit Obligation.
- Visual model (SVG) of the entitlement logic (Resignation vs. Termination).
- Standard Journal Entries for recording the provision.
- Interactive Tool: Calculate the expected benefit based on tenure and salary.
1) What is End of Service Benefit?
It is a lump sum amount paid by the employer to the employee at the end of their service contract. It serves as a reward for the period of service and is considered a statutory right in many jurisdictions (like Saudi Arabia, UAE, etc.).
2) Calculation Rules (Standard Labor Law)
While laws vary slightly, the general standard often used for calculation is:
- First 5 Years: Half a month’s salary for each year.
- Subsequent Years: A full month’s salary for each year following the first five.
3) Accounting Treatment (IAS 19)
Under IAS 19, EOSB is classified as a “Defined Benefit Plan.” The company must recognize the liability as the employee renders service, not just when they leave. This involves estimating the Present Value of the future payment.
Accounting Guidance Playbook - PDF File
4) Visual Logic: Calculation Flow
5) Journal Entries (The Provision)
At the end of each period (e.g., Year-end), the company estimates the increase in the liability:
When the employee actually leaves and gets paid:
6) Interactive EOSB Calculator
Estimate the end of service award based on standard rules:
7) Frequently Asked Questions
Do I account for salary increases?
Under IAS 19, yes. You should use the “Projected Unit Credit Method” which considers future salary increases. For simpler local statutory purposes, current salary is often used.
Is EOSB tax deductible?
In many jurisdictions (like KSA Zakat), only the amounts actually paid to employees or approved provisions according to specific rules are deductible. Consult your tax advisor.
8) Conclusion
The summary is simple: EOSB is a debt you owe your employees. Ignoring it distorts your profits and hides a growing liability. By calculating it correctly and recording the provision annually, you ensure your financial statements present a fair view of the company’s obligations.