Gratuity Provisions Under IFRS: A Guide for UAE Employers

ACCOUNTING · PAYROLL · NOVEMBER 2026

For most UAE companies, end-of-service gratuity is one of the largest liabilities on the balance sheet, and one of the most often understated. It builds up quietly every month an employee works, then lands as a single cash payment when they leave. IFRS says you must recognise it as it builds up. Here is how the obligation is calculated, how to account for it, and the mistakes auditors pick up most often.

What the UAE Labour Law requires

Under Federal Decree-Law No. 33 of 2021, a private-sector employee on the UAE mainland who completes at least one year of continuous service is entitled to end-of-service gratuity when the contract ends:

• 21 days of basic salary for each of the first five years of service;
• 30 days of basic salary for each additional year;
• part years counted pro rata, as long as the first full year is complete;
• days of unpaid absence excluded from service;
• a total cap of two years' wages.

Gratuity is based on the last basic salary, not total pay, so allowances such as housing and transport are left out. Since the 2021 law, the amount no longer falls when an employee resigns rather than being terminated. The final settlement, including gratuity, must be paid within 14 days of the contract ending.

To check an individual figure, use our free UAE gratuity calculator.

Why IFRS treats gratuity as a liability

Under IAS 19 Employee Benefits, gratuity is a post-employment defined benefit plan. The employer promises a lump sum that depends on final salary and length of service, and it carries the risk that salaries rise or staff stay longer. In the UAE the plan is usually unfunded: there is no separate fund, just a promise to pay.

The obligation arises as employees provide service, not when they leave. So at every reporting date, the balance sheet must show the gratuity employees have earned so far, and profit or loss must carry the cost of the year's service. Booking gratuity only when it is paid understates both, sometimes by years of build-up.

Two ways to measure it

	Actuarial valuation (full IAS 19)	Simplified "if everyone left today" basis
How it works	Projected unit credit method: projects each employee's gratuity at expected leaving date using future salary growth, staff turnover and mortality, then discounts it to today	Calculates what each employee would receive if their contract ended at the reporting date, using current basic salary and service
Discount rate	Yield on high-quality corporate bonds; where the local market is not deep, government bond yields. UAE valuations commonly use US dollar yields, because the dirham is pegged to the dollar	None
Remeasurements	Actuarial gains and losses go to other comprehensive income (OCI), not profit or loss	All movements go through profit or loss
Who uses it	Larger employers, listed and regulated entities, groups reporting to overseas parents	Many SMEs, especially those reporting under IFRS for SMEs
Audit view	Expected where the liability is material	Often accepted if the difference from an actuarial figure is not material

IFRS for SMEs (Section 28) also treats gratuity as a defined benefit obligation, but it allows simplified measurement in some circumstances. Whichever method you use, apply it consistently, document it, and agree it with your auditor before year-end rather than during the audit.

A worked example with journal entries

Take an employee on a basic salary of AED 10,000 a month. Like most UAE calculators, we use a daily rate of basic salary ÷ 30, which gives AED 333.33.

Service at year-end	Days earned	Gratuity earned
3 years	3 × 21 = 63 days	AED 21,000
4 years	4 × 21 = 84 days	AED 28,000
6 years	(5 × 21) + (1 × 30) = 135 days	AED 45,000

Using the simplified basis, if the employee moves from 3 to 4 years of service with no pay rise, the provision rises from AED 21,000 to AED 28,000. The year's charge is the difference:

• Dr Employee benefits expense (end-of-service) AED 7,000
• Cr Provision for end-of-service benefits AED 7,000

If the employee's basic salary rises, the whole provision is recalculated on the new salary, including past years. That catch-up is why gratuity costs jump in years with big pay rises. When the employee leaves and is paid, the payment is set against the provision:

• Dr Provision for end-of-service benefits
• Cr Bank

Any difference between the provision and the amount paid goes to profit or loss. Under an actuarial valuation, the charge splits into current service cost and interest cost in profit or loss, with remeasurements in OCI.

The provision is normally shown as a non-current liability, with any amount expected to be paid within 12 months, such as staff who have resigned, shown as current.

DIFC, DEWS and the savings scheme

Not every employee earns traditional gratuity.

• DIFC: employers pay monthly contributions to the DEWS savings plan, or an approved alternative, instead of accruing gratuity for service covered by it.
• The voluntary savings scheme: under Cabinet Resolution No. 96 of 2023, mainland and free zone employers can pay monthly contributions to an approved fund instead: 5.83% of basic salary for employees with less than five years of service and 8.33% from five years.

Contributions for service covered by these schemes are generally accounted for as a defined contribution expense when they fall due. But gratuity earned before an employer joined a scheme does not disappear. It stays on the balance sheet as a defined benefit obligation until it is settled.

The Corporate Tax angle

UAE Corporate Tax starts from accounting profit, so the gratuity expense in profit or loss generally flows into your tax computation. Two points need care. Remeasurement gains and losses booked in OCI under an actuarial valuation are not in profit or loss, so their tax treatment needs separate thought. And an understated provision means an overstated profit, so getting gratuity right also matters for the tax you pay. Check the treatment with your tax adviser when you prepare the return; our Corporate Tax guide covers the basics.

Mistakes auditors find most

1. Booking gratuity only on payment. The liability for everyone still employed is missing from the balance sheet.
2. Using total salary instead of basic. This overstates the provision; check what each contract defines as basic.
3. Not recalculating after pay rises. The provision must use the current basic salary for all past service, not the salary when each year was earned.
4. Leaving out staff with under a year's service. No gratuity is payable if they leave now, but under an actuarial valuation part of their expected entitlement is already being earned.
5. Ignoring the switch to 30 days. Long-serving staff earn 30 days a year after year five, and the cap of two years' wages still applies.
6. No employee-level schedule. Auditors want a schedule by employee with joining date, basic salary, unpaid leave and the calculation, reconciled to payroll.
7. Forgetting pre-scheme balances. Joining DEWS or the savings scheme does not release gratuity already earned.

Year-end checklist

Check	Done?
Employee list agrees to payroll and visa records	☐
Basic salaries are the latest figures, per contract	☐
Joining dates and unpaid leave days confirmed	☐
21-day and 30-day bands and the two-year cap applied	☐
Leavers paid during the year set against the provision	☐
Measurement method agreed with the auditor; actuarial valuation obtained if needed	☐
Current and non-current split and disclosures prepared	☐

Our payroll service keeps an up-to-date gratuity schedule every month, and our IFRS bookkeeping books the provision as part of each monthly close, so year-end and the audit hold no surprises.

General information based on UAE Labour Law and IFRS as of November 2026, not accounting, legal or tax advice. Free zone employment rules and your contracts may differ; take advice on your own position.