Actuarial Valuation of End-of-Service Benefits (EOSB) under IAS 19: When to Use the Straight-Line Approach

Introduction

In many Middle East jurisdictions—such as the Gulf region—the employer’s obligation to pay end-of-service benefits (EOSB) represents a significant component of employee compensation. Under IAS 19, such EOSB commitments are generally treated as defined benefit plans, and require actuarial recognition of the liability. While the standard’s preferred method is the Projected Unit Credit (PUC) method, there are circumstances in which a straight-line (service pro-rated) attribution of benefits must be applied.

This article explains what triggers the straight-line attribution approach, how it is implemented in practice (with a worked example), and how that influences the liability measurement in your financial statements.

1. Basis for Valuing EOSB under IAS 19

Under IAS 19, an entity must determine its defined benefit obligation (DBO) for EOSB by:

• Estimating the benefits expected to be paid to employees at exit or retirement;

• Projecting those benefits to reflect future salary growth;

• Discounting the resulting future payments to present value using a high-quality corporate bond rate (or equivalent).

These steps form part of the PUC method of attributing employee service cost. According to IAS 19 paragraph 73, if benefit accrual is disproportionately greater in later years of service, then a straight-line approach must be adopted rather than simply applying the plan’s formula. In other words: when the benefit pattern is back-loaded, straight-lining ensures recognition of expense reflects service evenly over the vesting period.

2. When the Straight-Line Approach Is Required

The straight-line service cost allocation becomes mandatory when the EOSB plan’s design causes significant benefit build-up in the later years of service. A typical example seen in the Gulf region: an EOSB plan pays 15 days’ salary per service year for the first five years, but steps up to 30 days’ salary per year thereafter.

The accrual of benefits is clearly heavier in later service years, so applying the standard formula would front-load expense recognition and understate earlier service cost. In such instances, the straight-line method (i.e., spreading the total projected benefit evenly over the total anticipated service years) aligns recognition with the notion of service cost.

3. How to Implement the Straight-Line Approach

The following process sets out how actuaries apply the straight-line methodology for EOSB:

1. Project the total benefit entitlement at the expected exit or retirement date: determine the final salary at that date, apply the step-up accrual formula, and estimate the total EOSB payable.

2. Allocate the benefit across the service period: divide the total projected benefit by the expected total years of service (T) to derive the portion attributable to each service year (t). Hence for each year the employee remains, the service cost recognised is (Projected Total Benefit ÷ T).

3. Discount the future cash flows: apply the discount rate to the annual service cost to derive the present value of the defined benefit obligation.

4. Recognise the expense each period: the straight-line allocation means the expense recognised in profit and loss is identical each year (assuming service continues), rather than being back-loaded.

Under IAS 19, both the benefit attribution (paragraphs 70–74) and the recognition of actuarial assumptions (paragraphs 76–83) must be handled within the Projected Unit Credit framework. Therefore, even when straight-line attribution is applied, the valuation still incorporates assumptions such as salary escalation, discount rates, turnover probabilities, and mortality — ensuring the liability reflects the discounted present value of expected future payments.

4. Worked Example

Consider an employee whose current salary is SAR 225,000, expected to serve for 20 years, and with a final salary projected at SAR 500,000. Suppose the EOSB plan provides:

• 15 days of salary per year for the first 5 years;

• 30 days of salary per year for the subsequent 15 years.

Calculate the total EOSB entitlement at year 20 by combining the two accrual bands, then divide this total by 20 years to derive the straight-line service cost per annum. Finally, discount to present value as required under IAS 19. With this approach, the company recognises the same annual cost each year, rather than increasing recognition in later years due to the benefit step-up.

5. When Not to Use the Straight-Line Approach

The straight-line attribution is not appropriate when:

• The benefit accrual is uniform (e.g., one month’s salary per year of service) and does not accelerate in later years;

• The benefit formula has a cap or limit such that accrual slows or ceases in later years. In those scenarios, the standard accrued-service approach under the PUC methodology remains appropriate: expense recognised reflects service already rendered, not evenly spread.

6. Differences in Liability and Expense Outcomes

Using the straight-line approach typically results in a higher defined benefit obligation (DBO) relative to the accrued-service approach—especially for younger employees with lower years of service. The reason: the projected service cost for early years is increased, because recognition is smoothed rather than back-loaded. For employees close to the exit point, both methods converge in outcome. From a practical standpoint, early-stage employers (or those with many newer staff) will see a more material difference between the two methods.

7. Summary and Key Take-aways

• EOSB schemes in Gulf-region firms typically fall under defined benefit accounting in IAS 19.

• The PUC method is the overarching methodology; within it, the disclosed formula may be replaced by straight-line attribution when accrual is back-loaded.

• The straight-line approach ensures recognition of service cost is evenly allocated across service years.

• Step-up accrual schemes very often trigger the need for straight-line attribution.

• Flat accrual schemes or those with benefit caps generally do not require straight-line treatment.

• Companies should expect a higher DBO when using straight-line attribution, especially for newer staff.

• Actuaries must ensure the chosen method is justifiable, clearly explained in disclosures, and consistently applied under IAS 19.

Why This Matters for Middle East Employers

For employers operating in the UAE, Saudi Arabia and broader GCC region, accurate actuarial valuation of EOSB obligations is not only a compliance exercise — it affects reported liabilities, expense recognition, loan covenants, balance sheet metrics and potentially bonus or remuneration structures. By partnering with a specialist actuarial firm, organisations can ensure that:

• EOSB valuations are IAS 19-compliant and reflect the correct attribution method;

• The impact of step-up accruals (or other plan design features) is properly reflected;

• The disclosure in the financial statements is rigorous and clear for auditors and stakeholders.

We invite interested organisations to reach out to Royal Falconian for tailored guidance on EOSB valuations, end-of-service benefit modelling, and broader employee-benefit obligations under international accounting standards.