Provisioning end-of-service on your balance sheet: the monthly accrual method

Key Takeaways

• Under IAS 19, UAE end-of-service gratuity is a defined benefit obligation: the liability must be recognised on the balance sheet as it accrues, not expensed only when an employee actually leaves.
• The monthly accrual formula is (21 or 30 ÷ 365) × basic salary, using 21 days per year for the first five years of service and 30 days per year beyond that.
• A 3-year employee on AED 10,000 basic salary generates a monthly gratuity provision of roughly AED 575, debited to payroll expense and credited to a gratuity provision liability account.
• Where IFRS is applied, the gratuity expense reduces taxable income as it accrues, provided normal deductibility conditions are met, making the provision a genuine, ongoing tax position rather than a one-off event at resignation.

A business that only thinks about gratuity when an employee resigns is managing a real, growing liability off the books until the day it comes due in full. End-of-service gratuity isn't a one-time bonus decided at exit, it's a legal entitlement that accrues from an employee's first day of service, and accounting standards treat it accordingly: as a liability that builds monthly, whether or not anyone is actually leaving.

Why gratuity sits on the balance sheet, not just the P&L at exit

Under IAS 19 (Employee Benefits), UAE gratuity qualifies as a defined benefit obligation: the company bears the obligation to pay a predetermined amount at the end of service, and that liability must be recognised as it accrues, not deferred until payment (Insights UAE, IAS 19 disclosure rules for UAE financial statements, retrieved 2026-09-08). Most UAE gratuity plans aren't externally funded (unlike DIFC's DEWS scheme, which is), so the full liability sits on the balance sheet as an unfunded provision, growing every month an employee stays.

This distinction matters for anyone reading the accounts, a bank, an investor, an acquirer, because a business that hasn't provisioned gratuity monthly is understating its liabilities in every set of interim accounts it produces, even if the year-end number eventually catches up once someone actually resigns and the cash goes out.

The formula, and a worked example

The monthly accrual is calculated as: (21 or 30 ÷ 365) × basic salary, using the 21-day rate for years one through five of service and the 30-day rate for any service beyond that (Zoho Payroll, gratuity provisioning and accounting for UAE companies, retrieved 2026-09-08). For an employee three years into service on a basic salary of AED 10,000, the monthly provision works out to (21 × 10,000 ÷ 365) × 1 ≈ AED 575 per month. Run your own headcount and basic salary figures through the UAE gratuity calculator to get the current monthly accrual across your full team, since the rate changes for every employee who crosses the five-year mark.

Note that this calculation uses basic salary specifically, not gross salary or total package, housing allowance, transport allowance, and other benefits are excluded from the gratuity base entirely. A business that accrues against gross salary is systematically over-provisioning; one accruing against a lower "all-in" figure that isn't actually the contractual basic salary risks under-provisioning instead.

The bookkeeping entry itself

Each month, the accrual is recorded as a debit to payroll or employee benefits expense on the profit and loss account, and a credit to a gratuity provision account on the balance sheet (Zoho Payroll, retrieved 2026-09-08). This keeps the expense recognised in the period the employee actually earned it, matching the accounting principle behind accrual-based reporting generally, rather than concentrating a large, lumpy expense in whichever month an employee happens to resign.

At year end, companies applying IFRS in full also need to reconcile the provision and report any actuarial gains or losses through other comprehensive income, a step that's easy to skip in a simplified monthly-accrual approach but matters for larger entities or anyone whose accounts get read by a bank or auditor closely (Insights UAE, retrieved 2026-09-08).

Why this is also a tax position, not just a bookkeeping habit

Where IFRS is applied and deductibility conditions are met, the gratuity expense reduces taxable income as it accrues each month, rather than only in the year an employee actually leaves (Beyond Numbers, UAE gratuity provision bookkeeping and corporate tax deduction, retrieved 2026-09-08). A business that only books gratuity as a cash expense at resignation is missing a legitimate, recurring deduction every month in between, which compounds into a real difference in reported taxable income over several years of steady headcount growth.

What this changes about cash planning

Provisioning on the balance sheet is an accounting exercise; funding the provision, setting aside actual cash against it, is a separate decision most UAE businesses still need to make deliberately, since standard gratuity (outside DIFC's DEWS) isn't held in a ring-fenced account by default. A business that accrues correctly on paper but never sets aside the corresponding cash still faces the same liquidity shock at a large resignation or restructuring; the accounting fix and the cash-management fix are both necessary, and neither substitutes for the other. Bringing this provisioning line into a broader financial health review is where the accounting fix and the cash-management fix actually get reconciled against the rest of the balance sheet.

Frequently asked questions

Should gratuity be accrued monthly even if no employee is close to leaving?

Yes. IAS 19 treats gratuity as a liability that accrues from an employee's first day, independent of whether or when they're expected to resign. Waiting until resignation to book the expense understates liabilities on every interim balance sheet in between.

Does the gratuity accrual use gross salary or basic salary?

Basic salary only. Housing, transport, and other allowances are excluded from the calculation entirely, so an accrual based on gross or total package will overstate the actual liability.

Does provisioning for gratuity mean the cash is set aside automatically?

No. Provisioning is an accounting entry recognising the liability; funding it, actually setting aside cash to cover the eventual payout, is a separate decision. Most standard UAE gratuity arrangements (outside DIFC's DEWS) are unfunded by default.

The bottom line

Gratuity is a liability from day one of employment, not a surprise bill at resignation. The monthly accrual formula is simple enough to run in a spreadsheet or payroll system, and doing it consistently keeps the balance sheet honest and captures a real, ongoing tax deduction that a year-end-only approach leaves on the table.

Figures were verified on 8 September 2026 against published UAE gratuity accounting and IAS 19 guidance. Gratuity rules, tax deductibility conditions, and IFRS disclosure requirements are subject to change; confirm current treatment with your accountant or auditor before finalising a provisioning policy.