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Valuation of long service leave employee entitlements

Long service leave (LSL) is an important employee benefit, which particularly helps to retain employees that have been with an organisation for some time. Under LSL, employees generally receive two or three months of pay after 10 years of continuous full-time service (depending of the state, note in ACT LSL vests after 7 years of service on a pro-rata basis). For periods of service between 5 and 10 years, various rules apply on the amount of LSL entitlements depending on state. Moreover, redundancy and resignation can have differing impacts on LSL vesting and entitlements. Superannuation is generally paid when LSL is taken during periods of employment, however termination LSL benefits are usually superannuation exempt.

Valuation of long service leave is a complex task. Hence, the Australian Accounting Standard 119 (AASB 119) mandates LSL to be valued on an actuarial basis. A number of assumptions are required in the valuation of LSL entitlements. While some of the assumptions (like mortality and discount rates) are available to the actuary, several assumptions are organisation specific and require the input of senior members of the organisation. Some of these are:

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  • expected salary increases and progression rates

  • expected rates of withdrawal (ill-health, resignation and redundancy)

  • expected rate of LSL uptake during service

  • salary on-costs

 

Some of these inputs require the analysis of the patterns of past employment. An interesting by-product of LSL assumption discussion can be the valuable insights the organisation can get on the behaviour of their own employees, which may prompt them to modify practices to manage employment-related risk within the organisation.

Accurate valuation of LSL benefits is an important aspect of financial reporting requirement of the organisation. Simplifying assumptions can distort reporting of such liabilities by either under- or over- estimating the LSL liabilities.

At TCW we provide we provide services to our corporate clients valuing these entitlements in accordance with Australian Accounting Standard AASB2 standards, using a suite of in-house software tools that can be tailored to the unique circumstances of each client. Our valuations are fully auditable and provide all the disclosures relevant to preparing our clients' financial statements.

 

The TCW Actuarial Service

The advantages of using TCW Actuarial consulting services include:

  • We combine the skills of actuaries and experienced executives with finance, accounting and stockbroking backgrounds to assist a number of ASX listed companies

  • Team of consulting actuaries, and PhD qualified actuarial analysts.

  • Our valuations incorporate the most appropriate methodology and assumptions for the particular circumstances of our clients.

  • TCW has valued a wide range of Long Service Leave liabilities for many companies listed on the ASX.

The TCW Approach

SERVICE PHILOSOPHY

We are dedicated to providing professional services and advice that is client focused, timely and clearly presented. We invest heavily in the latest technological and research tools available globally, and have built many of our own computational tools needed for our services.

FEES

We are happy to work on either a time-cost basis or negotiate a fixed fee for a task. We are very cost conscious and our aim is to work as cost effectively as possible. We believe our fees are highly competitive.

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