End-of-Service Benefits in Saudi Arabia: The Labour Law Formula and the IAS 19 Accounting

Half a month's wage for each of the first five years, a month's wage for each year after that, computed on the last wage. That is Article 84 of the Labour Law in one sentence, and it is the part the calculator sites get right.

The half they leave out is the accounting. Nobody funds the award and nobody insures it: the employer owes it, and what he owes depends on how long people stay and what they are paid when they go. Under IFRS that is a defined benefit plan, measured by the projected unit credit method, discounted at a market bond yield, with the year-to-year surprises routed to other comprehensive income rather than profit. A company with two hundred staff and no pension scheme carries an actuarial valuation whether it commissioned one or not.

Both halves are examinable, and they sit in different papers. Every article number below is read off the consolidated Arabic text published by the Ministry of Human Resources and Social Development, whose title page carries Royal Decree M/44 of 8/2/1446H, the amendments in force since 19 February 2025.

What the Labour Law actually awards

Article 84 is short enough to quote: أجر نصف شهر عن كل سنة من السنوات الخمس الأولى، وأجر شهر عن كل سنة من السنوات التالية، ويتخذ الأجر الأخير أساسًا لحساب المكافأة. It adds a proportionate award for parts of a year, بنسبة ما قضاه منها في العمل, so nothing rounds up to a whole year and no part year is forfeited.

Two definitions in Article 2 decide more than they seem to. A month is thirty days unless the contract or the work regulations say otherwise, so the daily rate is the monthly wage over thirty. Continuous service runs from the start of service with the same employer أو خلفه النظامي, his legal successor, so a business transfer does not reset the clock, and statutory leave, examination absence and unpaid absence of up to twenty intermittent days in a work year do not break it. Article 10 counts every period in the Law by the Hijri calendar unless the contract or the work regulations say otherwise, and a Hijri year is about eleven days shorter, so the same employment yields marginally more completed years.

Resignation: a third, two thirds, and all of it

Article 85 is the article people search for. Where the relation ends بسبب استقالة العامل, because of the worker's resignation, the award is cut on a three-step scale.

Continuous service when the worker resigns	Share of the Article 84 award
Under two consecutive years	Nothing
Not less than two consecutive years and not more than five	One third
More than five consecutive years, below ten	Two thirds
Ten years or more	The whole award

Article 87 carves it back open. The full award is due where the worker leaves نتيجة لقوة قاهرة خارجة عن إرادته, as the result of a force majeure outside his control, and where a female worker ends the contract within six months of her marriage contract or three months of giving birth. Article 81 lets the worker leave without notice مع احتفاظه بحقوقه النظامية كلها, retaining all his statutory rights, in seven listed situations, among them the employer's failure to meet a material obligation. Article 85's reduction is drafted for resignation, which an Article 81 departure is not; where the employer disputes that, it is for the labour courts.

The 2024 amendments did not touch Articles 84 to 88. They did add Article 79 bis, which fixes when service stops running: a resignation request is deemed accepted after thirty days without a reply, the employer may postpone acceptance by up to sixty days for stated reasons given in writing before those thirty days expire, the worker may withdraw within seven days unless it has already been accepted, and no deferred date may be written into the request. Article 78 counts a notice period as service even where the employer releases the worker from working it.

Which wage the award is computed on

Article 2 settles the question disputes start over, in three words: الأجر: الأجر الفعلي. Wherever the Law says wage it means the actual wage: the basic wage, what is given for the work plus periodic increments, plus every other due increase. Article 2 lists those increases as commission and percentages of sales, production, collections or profits; allowances for effort or risk; increases for the standard of living or family burdens; grants and bonuses the contract, the work regulations or custom have made part of the wage rather than a gift; and in-kind benefits, capped at two months of basic wage a year unless the contract or the work regulations value them higher.

Article 86 is the one permitted carve-out, written as an exception to Article 8: the parties may agree to leave commissions and percentages of the price of sales, variable by nature, out of the settlement wage. Article 8 voids every other release of a right the Law creates given during the contract unless it favours the worker, so a housing allowance cannot be agreed away.

A worked example on round illustrative figures, not a guide to pay. A last actual wage of SAR 20,000 and eight completed years: five years at half a month plus three at a full month is 5.5 months, or SAR 110,000.

How the relation ends at eight years	Months of wage	Award, illustrative
Employer ends it, or it ends for a reason that is not resignation	5.5	SAR 110,000
Worker resigns	Two thirds of 5.5	About SAR 73,300
Employer terminates on an Article 80 ground	None	Nil

When no award is due at all

Article 80 lists nine grounds on which the employer may terminate دون مكافأة العامل، أو إشعاره، أو تعويضه, without award, notice or compensation, on one condition attached to all nine: the worker must be given the chance to state his objection. Several carry their own procedure: absence needs more than thirty days in a contract year or fifteen consecutive days, with a written warning after twenty days or ten. Article 54 removes the award where the contract ends during probation, capped at 180 days by Article 53.

Where the award is due, Article 88 times it: within a week of the end of the relation, or two weeks where the worker ended it. And it is not the compensation for unlawful termination, which Article 77 sets separately at fifteen days' wage per year on an indefinite contract or the remaining term on a fixed one, with a floor of two months.

Why this is a defined benefit plan and not just an accrual

IAS 19 defines post-employment benefits as employee benefits, other than termination and short-term benefits, payable after employment ends, and a post-employment benefit plan as a formal or informal arrangement providing them. Defined contribution plans are those where the entity pays fixed contributions into a separate fund and owes nothing more; defined benefit plans are everything else. No fund, no fixed contribution, therefore a defined benefit plan.

Paragraph 164 closes the escape route: benefits provided regardless of the reason for departure are post-employment benefits rather than termination benefits, and it names the vocabulary this region uses, termination indemnities or gratuities. Paragraph 56 adds that such a plan may be unfunded, which means no plan assets to deduct, so the net liability is the present value of the obligation and net interest is pure interest cost.

Measuring it: projected unit credit and the assumptions

Paragraph 67 requires the projected unit credit method, and paragraph 57 sets the sequence: estimate the ultimate cost of what employees have earned for current and prior service, decide how much is attributable to those periods, make the assumptions, then discount.

Attribution is where the Saudi formula gets interesting. Paragraph 70 attributes benefit under the plan's own benefit formula, but overrides that with straight-line attribution where service in later years leads to a materially higher level of benefit than in earlier years. Article 84 is back-loaded by design: year six earns twice what year one earns. Whether that clears "materially higher" for a given workforce is a judgement about that workforce, not a rule, and it is the one most worth documenting. The Interpretations Committee worked through the same paragraphs for a capped lump-sum award in an agenda decision finalised in 2021.

Then the assumptions, which paragraph 76 requires to be unbiased and mutually compatible.

Assumption	Why it bites here
Turnover, by mode of exit	A resignation at four years pays a third, the same exit at eleven years pays all of it. The award also falls due at any age, so turnover and not a retirement date drives the maturity profile.
Future salary increases	The award is computed on the last wage, so the liability projects final pay rather than scaling today's payroll.
Discount rate	Paragraph 83: market yields at the reporting date on high quality corporate bonds, and where there is no deep market in them, on government bonds, matched in currency and term. Whether such a market exists in riyals is a judgement the entity must support, and the one an auditor tests first.

Where the remeasurements go

Paragraph 120 splits the cost three ways: service cost in profit or loss, net interest in profit or loss, remeasurements in other comprehensive income. For an unfunded award, remeasurement is the effect of changes in the discount rate, the salary assumption and the turnover assumption, plus experience against last year's estimates. Paragraph 122 locks the door: those amounts are never recycled to profit or loss, though they may be moved within equity. A discount rate fifty basis points lower inflates the liability, and the loss sits permanently outside earnings. The disclosures follow: significant assumptions in absolute terms, a sensitivity analysis for each, and the weighted average duration.

The part that is not a post-employment benefit at all

In the example the worker takes about SAR 73,300 if he resigns and SAR 110,000 if the employer ends it, and paragraph 160 addresses that gap: where an entity provides a lower benefit for termination at the employee's request than at its own, the difference is a termination benefit. Termination benefits are not attributed to past service at all. Paragraph 165 recognises them at the earlier of the date the entity can no longer withdraw the offer and the date it recognises restructuring costs under IAS 37, so a company planning to let people go does not already have that excess on its balance sheet.

Do not push it too far. Not every route to the full award is an employer decision: retirement, death, the end of a fixed term and the Article 87 cases produce it without one, and those belong in the defined benefit obligation. Hence modes of exit rather than a single turnover rate.

The smaller companies route

Most Saudi entities are not publicly accountable and report under the IFRS for SMEs Standard as endorsed; which framework applies is in Full IFRS or IFRS for SMEs in Saudi Arabia. Section 28 keeps the projected unit credit method where the entity can use it without undue cost or effort, and lets actuarial gains and losses go to profit or loss or to other comprehensive income, an option full IFRS does not give. Where the method would involve undue cost or effort, paragraph 28.19 permits a simplification, and the third edition, issued in February 2025 and effective for periods beginning on or after 1 January 2027, changed it: measure the obligation assuming all employees terminate at the reporting date, and do not discount it. The award as if everyone walked out today. Which edition is endorsed in the Kingdom is a question for SOCPA, not the IASB.

Where to practise this

The topic is examined from two directions and answered from the wrong one more often than not: a Labour Law question wants the article, the fraction and the condition, an IFRS question the classification, the method and the statement the gain lands in. Prepito's Regulations course covers the Labour Law alongside the Companies Law, and the Financial Accounting course covers IAS 19 with the rest of the endorsed standards. Where the topic sits in each subject follows Prepito's course outline, not a published weighting.

For the papers themselves, see the SOCPA Regulations study guide and the SOCPA Financial Accounting study guide, or the SOCPA Fellowship programme. For what the endorsed layer adds, read How SOCPA Endorses IFRS.

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This is study material, not legal or accounting advice. Sources: the consolidated Arabic text of the Labour Law published by the Ministry of Human Resources and Social Development, the Ministry's guideline listing the amended articles and its announcement of them, IAS 19 Employee Benefits, the agenda decision on attributing benefit to periods of service, and the IFRS Foundation's education module on Section 28. Laws and endorsed standards change and the example figures are illustrative; confirm the current Arabic text before relying on any number here.