The actuarial valuation of employee benefits is a core element of modern financial reporting and a key foundation for ensuring the accuracy and reliability of end-of-service benefit obligations and long-term employee entitlements.
With the evolution of financial disclosure standards and governance requirements, companies—particularly large enterprises and semi-government entities—now have an urgent need for periodic and specialized actuarial valuations that comply with IAS 19 and related accounting standards.
Traditional estimations are no longer sufficient to ensure financial transparency, nor can they be relied upon in a business environment characterized by stricter oversight and higher expectations from investors and auditors.
In this article, we explore the importance of actuarial valuation, when companies need it, and the pivotal role that the certified accountant plays in ensuring accurate and compliant results.
What Is the Actuarial Valuation of Employee Benefits?
An actuarial valuation is an advanced calculation process designed to assess an organization’s future financial obligations toward its employees, based on approved methodologies and standards such as IAS 19. This assessment covers various employment benefits, including:
-
End-of-service benefits
-
Retirement plans
-
Short- and long-term employee benefits
-
Compensation-based or job-related benefit schemes
This valuation relies on actuarial methodologies that incorporate several economic, financial, and demographic assumptions—such as the discount rate, employee turnover rate, annual salary increases, and life expectancy—in order to estimate actual obligations objectively and reliably.
Key Factors Affecting the Actuarial Valuation
To achieve accurate results that comply with IAS 19, the actuarial valuation is based on several critical elements, including:
-
Core employee data, such as base salaries, allowances, hiring dates, type of scheme (social insurance or pension), age, gender, and job role
-
Financial assumptions, including the discount rate, annual salary increase rate, inflation rate, and cost of future benefits
-
Demographic assumptions, such as employee turnover, life expectancy, retirement probabilities, and promotion rates
-
The approved measurement methodology, most notably the Projected Unit Credit (PUC) method, which is the internationally recognized approach for IAS 19 valuation
-
Sensitivity analysis, which is a mandatory disclosure and includes assessing the impact of changes in:
-
Discount rate ±1%
-
Annual salary increases ±1%
-
Employee turnover rate
-
These analyses provide management with a clearer view of how sensitive the obligations are to shifts in key assumptions.
So Why Is This Complex Valuation a Strategic Necessity? Let’s explore together the strategic importance of actuarial valuation for companies.
The Importance of Actuarial Valuation for Companies
Actuarial valuation is a strategic tool that enables companies to manage employee benefit obligations efficiently and in full compliance, especially under IAS 19 and modern governance requirements. Its importance appears in several key areas:
Compliance with IAS 19 and International Accounting Standards
IAS 19 requires companies to measure and recognize employee benefit obligations using precise actuarial methodologies. Non-compliance exposes the company to significant audit findings, which may affect the credibility of financial statements and their acceptance by regulatory authorities.
Enhancing the Accuracy of Financial Statements
Actuarial valuation provides organizations with an accurate and objective financial picture of their present and future obligations related to employee benefits and end-of-service entitlements.
Through advanced mathematical models and precise economic and demographic assumptions, the valuation offers reliable estimates that reflect the true financial position of the entity. It also enables management to make strategic decisions based on accurate data and ensures compliance with accounting and auditing standards—strengthening confidence among:
Auditors
Partners
Regulatory authorities
Investors
Supporting Financial Decision-Making and Future Planning
Actuarial valuation allows management to rely on realistic and accurate estimates of future obligations rather than general assumptions. By analyzing employee movement, salary expectations, and discount rates, the valuation provides a clear picture that helps organizations:
Plan future cash flows
Estimate funding requirements
Manage financial risks
Assess the impact of salary changes
Shape HR policies with informed, data-driven decisions
This reduces risk and enhances financial sustainability.
Identifying Gaps in Benefit Obligations
One of the most important outcomes of actuarial valuation is its ability to reveal discrepancies or inaccurately recorded obligations in the company’s records, including:
Unexpected increases in benefit costs
Accumulated errors over the years
Differences caused by changes in policies
Early detection allows management to address these gaps before they become major financial burdens, giving the organization clearer visibility and protecting it from financial surprises—strengthening long-term planning.
Enhancing Governance and Institutional Transparency
Actuarial valuation results are a core component of governance and compliance requirements for private, government, and semi-government entities. They support higher-quality reporting and improve the level of professional accountability.
The Importance of Actuarial Valuation for Semi-Government Entities
Semi-government entities whose employees are subject to two different systems (Social Insurance + Pension System) face complex challenges due to differing benefit calculation rules and varying service durations.
Such organizations require a professional firm with combined actuarial and accounting expertise—this is precisely what Ethraa Al Sharq – Certified Accountants and Auditors provides through accurate and fully compliant actuarial evaluations.
Given the critical importance of actuarial valuation, identifying the right timing for conducting it becomes essential. Let us now outline when companies need to perform an actuarial valuation.
When Do Companies Need to Conduct an Actuarial Valuation?
The need for actuarial valuation varies depending on organizational and operational factors. However, international accounting standards—especially IAS 19—make actuarial valuation essential in key situations, including:
Preparing annual financial statements to ensure accurate measurement of obligations
When the company has a large workforce, increasing the complexity and financial impact of benefits
When applying two different retirement systems (Social Insurance / Civil Pension), particularly in semi-government entities
During restructuring, mergers, or acquisitions to assess combined obligations and financial impact
When significant changes occur in salaries or allowances, affecting end-of-service and long-term benefit costs
When updating compensation, allowance, or incentive policies
When required by regulators or statutory auditors to provide an independent valuation
This multidisciplinary process requires combined expertise to ensure full reliability—so how do the roles of the actuary and the certified accountant complement each other?
What Is the Difference Between the Role of the Actuary and the Certified Accountant?
Both the actuary and the certified accountant contribute to the IAS 19 valuation process, but each has a distinct and complementary professional role:
Role of the Actuary
The actuary is responsible for the technical side of the calculations, including:
Developing the actuarial model suited to the type of benefits
Setting demographic assumptions (turnover, mortality, retirement) and financial assumptions (discount rate, inflation, salary growth)
Conducting the complex mathematical calculations that determine present and future obligations
Preparing the actuarial report with methodology, results, and analytical tests
Role of the Certified Accountant
The certified accountant focuses on verification and compliance, including:
Reviewing the actuarial valuation to ensure full adherence to IAS 19
Testing key inputs such as salary data, service periods, and HR policies
Performing audit procedures, including sensitivity analysis to assess reasonableness
Ensuring the accuracy of disclosures related to employee benefits in the financial statements
This is where Ethraa Al Sharq plays a vital role as an accredited accounting firm capable of preparing and reviewing valuations with advanced professional standards.
The Role of Accounting Firms in Supporting Actuarial Valuations
Accounting firms help strengthen the reliability of actuarial valuations by:
Examining and reviewing actuarial report outputs
Auditing core data related to employee salaries and service durations
Preparing disclosures in full compliance with IAS 19
Issuing certified professional reports required by government and semi-government bodies
Enabling finance and HR teams to understand and analyze valuation results
Ethraa Al Sharq also provides advanced analytical services such as sensitivity testing, reviewing historical trends, assessing the impact of economic changes, and optimizing benefit policies to enhance the accuracy and stability of financial reporting.
Conclusion
Actuarial valuation of employee benefits represents a cornerstone of modern financial reporting aligned with international standards—particularly IAS 19. This process has moved beyond being a mere accounting requirement to becoming a strategic necessity for governance and transparency, especially for large corporations and semi-government entities seeking the highest level of accuracy in measuring their long-term obligations, such as end-of-service benefits.
The article highlights that actuarial valuation is not a random estimate; rather, it is a systematic process based on complex financial and demographic assumptions. It also underscores the pivotal role of the certified accountant in ensuring full compliance with IAS 19 and validating the reliability of the results.
Frequently Asked Questions About Actuarial Valuation
What is the actuarial valuation of employee benefits?
Actuarial valuation is an advanced analytical process used to measure a company’s future financial obligations toward its employees—including end-of-service benefits and retirement plans—based on demographic and financial assumptions and internationally recognized methodologies such as IAS 19.
When should companies conduct an actuarial valuation?
Actuarial valuation is required primarily when preparing annual financial statements to comply with IAS 19. It also becomes essential when the company has a large number of employees, when applying two different retirement systems (Social Insurance and Civil Pension), or in cases of restructuring, mergers, or acquisitions.
Why is compliance with IAS 19 important?
Compliance with IAS 19 ensures accurate and reliable financial statements, enhancing governance and institutional transparency. Non-compliance exposes the company to significant audit findings, affecting the credibility of financial disclosures before regulators and investors.
What is the difference between the role of the actuary and the certified accountant?
The actuary is responsible for building the actuarial model, determining assumptions, and performing the complex calculations. Meanwhile, the certified accountant reviews the valuation, tests the accuracy of inputs, and ensures full alignment with IAS 19 requirements and financial disclosures.
