Financial reporting for long service leave
October 2014
Long service leave is an important employee benefit available to all Australian employees and simultaneously a significant
cost to the employer that should not be taken trivially.
Long service leave entitlements are enforced by legislation specific to each state and provide a minimum benefit of
8.67 weeks paid leave after 10 years of continuous service1. The Australian accounting standard, AASB 119, sets out
how long service leave entitlements should be recognised and measured in employers’ financial statements.
AASB 119 requires identification of the following items in the financial statements:
„„
the current and non-current liability,
„„
service cost,
„„
interest cost, and
„„
re-measurement/actuarial gains and losses.
Please note: If the company funds their long service leave entitlements by holding assets in a long-term employee benefit
fund then the fair value of the plan assets and the return on those plan assets are required to be identified in the financial
statements.
The current and the non-current liability
AASB 119 stipulates that the expected present value of an employer’s long service leave liabilities be recognised on their
balance sheet. The accounting standard specifies that the liabilities must be calculated using an actuarial technique
(the projected unit credit method). This calculation involves projecting employee salaries and accrued long service leave
entitlements to the date that the employee becomes eligible to receive these benefits. Depending on the assumed long
service leave taking pattern, the accrued liability is expensed and the present value of the liabilities is calculated applying
an appropriate discount rate. For each future year, the probability of employee exit due to death, incapacity, redundancy,
retirement and withdrawal are considered in the calculation.
The current liability is calculated as the value of the long service leave benefits that is expected to be paid within the next
12 months.
To calculate these liabilities, actuarial assumptions are needed for demographic variables such as employee turnover, mortality
and incapacity rates, as well as economic assumptions. The present value of the long service leave liability is particularly
sensitive to the following assumptions:
„„
rates of withdrawal (or employee turnover),
„„
discount rate,
„„
salary increase, and
„„
how and when leave is actually taken (leave taking pattern).
Whilst most employers rely on their actuarial advisers to carry out these complex calculations, responsibility for setting the
assumptions underlying the calculations rests with the company directors. The assumptions selected should reflect the
expected experience of the employers’ own workforce. Actuarial advice on appropriate assumptions can be provided based
on analysis of historic company data.
1 ACT employees are entitled to 6.06 weeks after 7 years of continuous service.
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Service cost
The service cost is the value of the long service leave entitlements accrued during a financial year and is identified in the
income statement for that financial year. The service cost is calculated by determining the present value of new accruals.
Net interest on the liability
The interest cost is the interest accrued on the long service leave liability over the financial year. The interest cost calculation
requires identification of the long service leave liability at the start of the financial year, the benefits paid during the financial
year and the service cost. The interest cost is recognised in the income statement.
Re-measurements of the liability
Remeasurements of the liabilities arise due to changes in the actuarial assumptions or due to experience during the financial
year differing from the assumptions made at the start of the year. Remeasurements of long service leave liabilities are
recognised immediately in the employer’s income statement.
Phone: 1800 203 123
[email protected]
www.accurium.com.au
This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). It is factual information only and is not intended to be
financial product advice, legal or tax advice and should not be relied upon as such. While all care has been taken to ensure the information is correct
at the time of publishing, Accurium is not liable for any loss arising from reliance on this information, including information that is no longer current.
We recommend that individuals seek appropriate professional advice before making any financial decisions.
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