End-of-service benefit is not years of service times final salary

Every close season brings the same case: a company that computed its end-of-service obligation by multiplying years of service by final salary, and whose external auditor raised a finding on the treatment two weeks before the statements were due.

Why the arithmetic is not enough

The standard treats end-of-service benefits as a defined benefit — a future obligation that must be discounted to present value. That calls for three assumptions the arithmetic does not contain:

• A discount rate — the obligation is paid years from now, and its value today is lower than its nominal amount.
• Expected salary growth — the benefit is computed on salary at departure, not on today's salary.
• Turnover rates — not every employee will stay long enough to earn the full benefit.

The direct calculation ignores all three, producing a figure that can be materially higher or lower than the right one depending on your workforce profile.

Where the effect actually shows

In a company with recent joiners and high turnover, the actuarial obligation is usually lower than the arithmetic, because many will never reach full entitlement. In a company with a stable, long-serving team it is usually higher, because expected salary growth outweighs discounting. The direction cannot be guessed from company size; it has to be measured.

If your auditor raised this last year and it was closed with a promise to address it, it will come back this year — usually in stronger terms.

What saves you time

Prepare the employee census early: joining date, basic salary, date of birth, contract type. The quality of the valuation follows the quality of that census, and what delays actuarial work is rarely the calculation — it is waiting on incomplete data. Better still, schedule the valuation ahead of close season rather than inside it, when everyone is under the same time pressure.