Q&A: Martin McGuigan: New legislation on end-of-service gratuities “is likely to bring more volatility on some balance sheets”

Author: Kirsty Tuxford | Date: 18 May 2016

Aon Hewitt's head of rewards consulting explains legal changes that demand more transparent accounting

Martin McGuiganFrom July this year, organisations in the UAE must be able to show that they have made the correct accounting entries related to their employee's end of service benefit. That means more details, and greater transparency for analysts and investors. Martin McGuigan, Aon Hewitt's head of rewards consulting, took People Management through the changes.

How will the new legislation on accounting for end-of-service liabilities affect organisations in the UAE?
From 1 July 2016, organisations in the UAE must prepare their financial statements with IAS19-compliant accounting entries and disclosures related to their obligations towards employees’ end-of-service benefits. Many organisations currently make accounting provisions that are not in line with international financial reporting standards (IFRS) requirements. Therefore, for organisations that have historically applied a methodology not consistent with IFRS, this change is likely to bring more volatility on their balance sheet as well as in total comprehensive income.
 
Complying with IFRS requirements changes the way benefit costs will be presented, with extensive disclosure required in the footnotes of an organisation’s financial statements.
 
As with any significant changes in legislation or accounting principles, organisations should carefully study the impact of these amendments on their financial statements. We expect that many sponsors will factor these changes into decisions on future benefit provision and perhaps even an increase in the trend for reviewing financing strategies.
 
End-of-service gratuity benefits for employees are not affected by this change. What changes is the way organisations accrue, account for and disclose the costs associated with their obligation to meet these benefit entitlements.
 
Which department is responsible for adhering to the new rules and ensuring that the relevant accounting standards are applied?
Typically, the area of responsibility falls between finance and HR but, overall, adherence to ensuring compliance with accounting requirements resides with executive management and ultimately the board of directors.
 
What are the penalties and repercussions for organisations that don't follow the new rules?
As with any companies’ law, directors have various responsibilities for their organisation, breach of which may not only be detrimental to those organisations and their shareholders, but also may lead to civil and criminal liability of the individual director concerned.
 
The directors of an organisation must not approve accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the organisation.
 
Users of financial statements, including investors and analysts, will welcome the improved transparency in the methodology for employee benefit accounting compared to that which existed before the new amendments.