Services

Valuation of Employee Entitlements

Cumpston Sarjeant has extensive experience providing valuations of liabilities arising from employee entitlements such as long service leave and recreation leave.

Such valuations may be required: in making appropriate accounting provisions for liabilities arising from employee benefits such as long service leave and recreation leave; on the sale of a business it may also be necessary to calculate the value of such liabilities.

We provide advice to companies and government departments.

The following provides some details concerning the Accounting Standards which apply, and tasks which we undertake. However for these valuations it is often best to discuss your requirements, in which case please contact Hugh Sarjeant on 03 9642 2242.

We are familiar with the following standards in relation to the valuation of employee liabilities:

• AASB 119, the Australian accounting standard for employee benefits, came into force from 1/1/05. Employee entitlements other than those expected to be settled within 12 months of the reporting date are to be measured as the present value of the estimated future cash outflows to be made by the employer.
• International Accounting Standard 19, which in summary requires use of the projected unit credit method. This method involves assessment of the liabilities for current employees, taking into account all types of decrements, and using a discount rate based on national government bonds.

Tasks which we undertake include:

• Experience investigations

  An experience investigation is undertaken in order to arrive at reasonable assumptions for the projection of future liabilities. Such an investigation may include analysing: staff turnover to determine appropriate demographic assumptions; rates of taking long service leave or recreation leave; salary and promotion experience for existing staff; the profile of new employees.

• Projecting future liabilities

  Based on the results of the experience investigation, and other appropriate assumptions, we would then do a projection to estimate future liabilities. This involves projecting each employee for each year of service. Such a projection allows for: the accrual of leave entitlements; salary increases; rates of survival in service; and the likelihood that leave entitlements will be taken at any time. The projected entitlements are summed to arrive at a liability in respect of the employees.
  Depending on the requirements, such a projection may or may not allow for the replacement of existing employees.

• Current value of liabilities

  As above, the Australian Accounting standard AASB 119 requires that employee entitlements, other than those which are expected to be settled within 12 months, be expressed in present values. The projection of future liabilities involves estimating the likelihood that leave entitlements will be taken. The assumed leave taken in each future time period is then discounted to current values.