What is Defined Benefit Obligation?
The defined benefit obligation (DBO) is the present value of future pension or end-of-service benefit payments an employer has promised to pay employees, based on services rendered to date. Under IAS 19, it is measured using the projected unit credit method and discounted using high-quality corporate bond yields.
How It Works
- Project future benefit payments using salary growth, turnover and mortality assumptions.
- Attribute benefits to past and future service periods.
- Discount the past-service portion to its present value.
- Disclose the assumptions and sensitivity in the financial statements.
Saudi Context
Under Saudi labor law, end-of-service benefits create a defined benefit obligation that all employers must recognize, regardless of size or industry.
Example
If projected future end-of-service payouts have a present value of SAR 80 million at year-end, that figure is the defined benefit obligation.