New Accounting Rules for Employee Benefits in the UAE
Employers in the UAE need to be ready for significant upheavals in the way End of Service funds are accounted for. From July 1st 2016, new law requires organisations to apply International Accounting Standard 19 (IAS 19), to account for their employee benefit programmes including the End Of Service benefits. It is, therefore, important for companies to understand the impact this will have on their financial statements.
The UAE End of Service benefit is classified as a Defined Benefit post-employment benefit and thus IAS 19 applies in measuring and disclosing the accounting cost on companies’ financial statements. Other long-term employee benefits can include jubilee benefits, sabbatical leave, long-term disability benefits and bonuses (if payable 12 months or more after the end of the period). The accounting under IAS 19 for long-term employee benefits is similar to that for post-employment benefit programs.
IAS 19 addresses three aspects of accounting for employee benefit programmes:
• Determination of the amount reflected in the current income statement
• Determination of the amount recognised on the company balance sheet
• Description of the information required in the financial footnotes to the corporate financial reports. The disclosure requirements are designed to assist readers of annual reports in accurately assessing the financial position of a company. The required disclosures include expense and liability items, as well as the assumptions used in deriving the results.
The statement of comprehensive income will contain:
• Service costs – benefit accrual, impact of plan amendments, curtailments and settlements
• Net interest – the interest on the balance sheet item
• Remeasurements – actuarial gains and losses, including changes in assumptions and the effect of changes in the maximum recoverable surplus.
Service costs and net interest will be presented in P&L, with no explicit requirement where in P&L they are presented. Remeasurements will be presented in Other Comprehensive Income (OCI). Net interest will be determined by applying the discount rate to the balance sheet asset or liability
Disclosures:
One of the IASB’s objectives is to provide disclosures that allow users of a company’s financial statements to understand the extent and effect of an employer’s provision of employee benefits. Therefore, IAS 19 requires extensive disclosure in the footnotes of a company’s financial statements, giving investors more insight on the true nature of an entity’s defined benefit plans by providing information about how the entity’s participation in the plans affects the amount, timing, and variability of its future cash flows. A sensitivity analysis will be required for each significant actuarial assumption to which the entity is exposed.
How can Aon Hewitt Help?
• Data collection and comprehensive review to insure the integrity and consistency of the data
• Validation of the benefit design per plan
• Guidance and correspondence to agree IAS19 financial and demographic assumptions
• Actuarial valuation as the balance sheet date calculating the liabilities as at your fiscal end date and projected benefit accrual
• Preparation of full IAS19 disclosures – includes the required balance sheet and P&L disclosures for the financial year ending 31 December and corresponding analysis and narratives for the notes
• Provide the expected P&L change of the following financial year, which can be used for budgeting purposes as well as the interim period reporting
• A full IAS19 report per entity that can be used by your auditors.
Contact us:
To find out more, please contact:
Martin McGuigan - [email protected]
Philippos Mannaris - [email protected]