Employee Benefits Valuation AASB19

Long service leave valuations; Sick leave valuations; Annual leave valuations; Superannuation advice; Superannuation fund selection; General consulting.

Background

Under Australian Accounting Standard 119 (AASB19), reporting entities are required to value their liabilities for employee benefits. These liabilities typically include those related to long service leave, annual leave and may include those related to current or former “defined benefit” superannuation schemes. Most long service leave benefits are directly financed by the employer but some are provided through special purpose, typically industry specific, funds.
Benefits

Actuarial determination of these liabilities provides a better measure of an entity’s net worth. As a by product of the valuation process, the costs of future benefits are known. This leads to a better measure of the true cost of employment.

Services

The practice’s services in this area are normally provided directly to companies, organisations, statutory authorities or fund trustees. Generally these services culminate in a report attached certifying the value of the liabilities or the solvency of the fund. These services include: –

• Valuation and Certification of Accrued Entitlements- the practice performs valuations of long service and annual leave liabilities accrued at a balance date. In doing this, it follows the requirements of AASB119.
• Costing of Future Accruals – the practice performs valuations of the costs of leave associated with future service allowing employers to assign as the cost of long service leave, a proportion of payroll. This proportion might be constant across the whole of an organisation or may vary between profit centers.
• Fund Solvency Studies- the practice undertakes solvency studies for Trustees of industry or multi employer long service leave funds. These studies determine the solvency of the funds and contain recommendations as to future contributions.
• Demographic Studies- demographic studies are often undertaken as part of the valuation process but can be used in employers’ general business planning processes. Such studies normally reveal the age and sex distribution of new employees expressed as means and standard deviations or as age specific proportions. They also reveal age and sex specific exit rates for a variety of exit reasons as well as promotional salary scales and details of the rate at which vested leave is utilised.
• General Consulting- the practice can assist employers in all other matters that involve these longer term benefits.

Methodology

In general, the practice’s methodology for long service leave valuation allows for the determination of the leave that will be paid in each future year and the probability of this being paid. These amounts are generally adjusted for the impact of promotional increases and inflation. These expected payments are then discounted to obtain a present value and then summed over all future years. The discount rate that is used is described in the Accounting Standard and depends on the economic climate at the valuation date.
The final stage of the process is to make allowance for “on costs”.
Where the task concerns the solvency of a long service leave fund, similar principles are used to obtain the present value of future contribution income.
Where there is a need for future funding factors to be calculated, similar principles are also applied.
In some cases, the demographic experience is examined. In others, the experience from a previous or other employer’s valuation is used. The practice prefers to conduct a full experience examination no less often than triennially.
Determination of superannuation liabilities follows a similar process centred around determining the expected benefit to be paid in each year.

Experience

The practice has been involved in the actuarial valuation of long service leave entitlements since before the publication of the predecessor of the current accounting standard. Most of its work has been for academic and government organisations.

Information Needs

The information that the practice needs to value these liabilities includes: –

• the valuation date;
• a copy of the award or other document establishing the liabilities;
• the applicable on costs and
• personal, salary and entitlement information for all employees.

If a demographic study is to be undertaken, details of all people employed at any time in the last three or five years are required. In other cases only details of people employed at valuation date are needed.

 download speadsheet (.xlsm).

Fees

The practice believes that quality service justifies its price, but seeks to be competitive in its fee structure and will quote fixed or maximum prices if required.
Hourly fees apply unless the task is solely related to the production of a standard certificate. Where the task makes substantial use of standard systems, usage charges apply.

Fees quoted do not include GST.