When managing a business in the United Arab Emirates (UAE), one of the key considerations is ensuring compliance with local labour laws, especially when it comes to employee benefits. A company’s operating cost would largely comprise of employee benefits, which are subject to complex calculations requiring adherence to regulations. Among these benefits, long-term obligations, e.g., gratuity, provide unique challenges. The purpose of this essay is to examine the specifics of calculating employee benefits, with a focus on gratuities.
Employee benefits encompass a wide variety of perks provided by companies in addition to regular employee salaries. These benefits can be categorised into:
- Short-term benefits: Includes wages, paid time off, bonuses, health insurance, and other immediate perks.
- Post-employment benefits: Comprise retirement plans, gratuities, and other benefits payable after employment ends.
- Other long-term benefits: Encompass extended service leave, career breaks, disability coverage, and similar benefits that extend beyond the immediate term.
Key Considerations for Gratuity in the UAE
Gratuity is a key post-employment benefit common in many countries, including the UAE. It’s a sum paid to employees when they quit or retire. Main accounting points to consider for gratuity:
- Accrual basis: Gratuity has the status of an accrued liability. This means companies should record it as an expense during the time an employee provides service, not just at the moment of payment.
- Expense recognition: Companies spread the cost of gratuity as an expense over the entire period an employee works for them.
- Liability recognition: The balance sheet outlines a provision for gratuity and the company’s liability as of the date of reporting. This makes the obligations of the company very clear and transparent.
- Disclosure: Financial statements need to include relevant information about the gratuity obligation, which means the method of calculation and the assumptions should be disclosed.
Other Employee Benefits
Apart from gratuity, other employee benefits will require thorough accounting treatment:
- Defined benefit plans: These are plans in which employers guarantee employees the payment of specific benefits after they retire. These plans are difficult to account for because they involve actuaries who make complex calculations of the estimated liabilities vs. available assets to satisfy funding requirements.
- Defined contribution plans: In these types, the employer, the worker, or both set aside money into the fund, and the compensation is tied directly to the performance of the fund. Accounting for defined contribution plans is usually easier than that of defined benefit plans.
- Medical insurance: The cost of medical insurance is typically recognised as an expense during the service period.
- Paid time off: The cost of the earned but unused vacation or sick leave is generally recognised as an expense in the period earned.
- The impact of accounting standards: International Financial Reporting Standards (IFRS) and the local accounting standards offer detailed guidance on accounting for employee benefits, respectively. Strictly following these standards is necessary for a truthful financial statement.
Challenges and Best Practices
Indeed, the accounting and the shortfalls of the employee benefits that go beyond the general concepts require professional judgement. Some common challenges are:
- Estimating future obligations: It is indeed a challenge to accurately forecast the future costs of defined benefit plans.
- Actuarial calculations: The calculations are highly intellectual.
For these challenges, keep the following measures in mind:
- Seek consultation by the experts: The company should interact with accountants or actuarial experts to make sure that accounting is done correctly.
- Invest in relevant software: Employ the software capable of handling employee benefits calculations.
- Keep detailed records: The company should maintain records of details of data, salaries, and service periods of employees.
- Regular check: Check the company’s equity plans and accounting policies to confirm the company’s compliance with accounting best practices.
The organisations can guarantee the correctness of financial statements by understanding the intricacies of accounting for the benefit of the employees, which will allow them to comply with their obligations to the distributed employees.
How can Gatestone Group help?
At Gatestone Group, we offer comprehensive accounting and advisory services to help businesses manage employee benefits effectively. Our team specialises in:
- Precise benefit expense calculation: We assist with precise calculations for various employee benefits, including gratuity, pensions, and healthcare, ensuring compliance with the UAE regulations.
- Compliance with local and international standards: Our experts ensure that all the benefit calculations follow both the local laws and international accounting standards, including but not limited to IFRS, IAS, and GAAP, along with relevant tax legislation.
- Handlings of complicated calculations: Leave the complication of the math in gratuity and pension liability computation to us; we perform the most detailed and appropriate financial projections.
- Transparent financial reporting: We provide clear, detailed financial statements, including comprehensive notes on employee benefit obligations, so your business remains well-informed.
- Risk management: We help identify and mitigate risks associated with employee benefits, such as underfunding or inaccurate estimation, ensuring your business stays financially secure.
- Tax-efficient planning: We can help you set up your employee benefit plans to save on taxes while still following the rules.
- Systems and software setup: We guide you in implementing efficient accounting systems and software that simplify benefit calculations and reporting, saving you time and effort.
Conclusion
The accounting and proper management of gratuities and pensions, among other employee benefits, are vital to maintaining compliance and financial stability within your business. At Gatestone Group, we ensure that your business deals with such liabilities accurately and efficiently, as per the law and as required by taxation authorities. For more on how we can assist in the management of your employee benefits toward long-term financial success, contact us today via email at info@gatestonegroup.com or call +971 4 450 1023 or +971 52 410 0849.
