Issue number:
12/2002
Date Issued:
28 May 2002
Issued to:
Public Hospitals
Purpose:
To confirm and update the accounting treatment for the funding of the net liability movements for Long Service Leave

This Circular replaces Circular 13/2001, which was issued on 14 June 2001. The amendments relate to:

  1. Changes in due dates.
  2. Clarification on claiming of cash revenue.

In 2000-01 the Department of Human Services (DHS) assumed the liability arising from the net increase in the Long Service Leave (LSL) provision of public hospitals. Hospitals therefore now record a net increase in the LSL liability as revenue with DHS a debtor.

Accounting for LSL

As previously advised in hospital circular 3/2001, at the introduction of casemix DHS included a loading of 1.8% of salaries for LSL purposes and this loading has continued to be applied in funding for award increases ever since. Analysis of data over the past four years indicates that generally hospitals manage cash outgoings within the 1.8% payment. However, where hospitals are paying out cash in excess of funding, DHS has agreed to provide additional funding to meet this excess. This arrangement commenced in 2000-2001 based on year end results.

The accounting entries for the cash component are as follows:

On payment for leave taken or paid in lieu:

(1)(a) DR LSL balance sheet liability account
CR Bank

On recognition of services delivered (casemix payment):

(1)(b) DR Bank
CR Revenue from Services Provided

The accounting entries for the non-cash component are calculated as a result of establishment of the year end balance sheet liability, and are accounted for as follows:

On calculation of AAS 30 Liability:

(2)(b) DR Operating statement accrued expense
CR LSL balance sheet liability account

On recognition of non-cash services delivered:

(2)(b) DR Debtors - DHS
CR non-cash revenue from services provided

By way of example:

Hospital XYZ began the financial year with an opening LSL leave liability of $10 million and ended the year with LSL liability of $15 million. The net movement is an increase of $5 million represented by:

Opening liability balance $10M
less Cash paid in LSL for the year $ 3M
Remaining liability before current year liability reinstatement $ 7M
AAS 30 calculated liability increase
Normal increase in entitlements $3M
Increase due to increase in award rates $2M
Change due to bond/wage inflation adj $3M $ 8M
Closing liability balance $15M Net Movement $5M ie.$15M less $10M

The accounting entries as described above would be presented as follows:

(1)(a) DR LSL balance sheet liability account $3M
CR Bank $3M
(1)(b) DR Bank $3M
CR Revenue from services provided $3M
(2)(a) DR Operating statement accrued expense $8M
CR LSL balance sheet liability account $8M
(2)(b) DR Debtors - DHS $5M
CR Non-cash revenue from services provided $5M

The debtor established by the non-cash revenue recognition can be run down in future years by a negative non-cash liability movement or by the claiming of cash revenue to match a cash expense greater than the amount recognised in Health Service Agreement cash budgets.

DHS requires details of the liability calculation to establish reciprocal expense and creditor entries in the DHS financial statements. Details are required by COB 5th working day of July. (Note: DHS will provide payroll suppliers with the bond and wage inflation factors on the 1st working day of July.)

Data provided to DHS will consist of the opening and closing LSL leave liability balances and details of the movement viz:

  • Normal increase in entitlements.
  • Increase due to increase in award rates.
  • Change due to bond/wage inflation adjustment.
  • Cash settlements.

Details of the total salaries are required to compare the 1.8% loading in the casemix payment to cash settlements made during the year.

The proposed data source for the movement calculation is the agency's payroll system data, to be made available to DHS on request.

The DHS contact for agencies to supply information by COB 5th working day of July is:

Manager, Financial Reporting
Level 15, 555 Collins Street, Melbourne
Phone: (03) 9616 8316. Fax: (03) 9616 7152
Email: reporting@dhs.vic.gov.au

Shane Solomon
Executive Director
Metropolitan Health and Aged Care Services

 

Explanatory Notes

Subject - Cash outgoings in excess of funding provided in relation to LSL payments

1. At the introduction of casemix, DHS included a loading of 1.8% of salaries for LSL purposes and this loading has continued to be applied in the funding of award increases ever since.

2. Hospitals Circular Publication 3/2001 dated 7 March 2001 entitled 'Management of Long Service Leave' recognised that generally large Hospitals manage within the 1.8% loading provided, although occasionally some smaller rural Hospitals experience difficulties by having to pay out cash in excess of funding.

3. In 2000-2001 DHS undertook to provide additional funding to Hospitals post the end of the financial year to offset cash outgoings in excess of funding provided.

4. At the end of each financial year Hospitals should assess from their financial records whether cash outgoings in relation to LSL are in excess of funding provided.

5. Where cash outgoings in relation to LSL exceed funding provided Hospitals should submit a written claim to:

Manager, Financial Analysis & Funding
Metropolitan Health & Aged Care Services
17/555 Collins Street, Melbourne 3000

6. Claims for 2001/2002 and for each subsequent financial year should be submitted by 31 October of the following financial year. For example, claims for 2001/02 should be made no later than 31 October 2002. No late claims will be accepted.

7. The claim should take the form of a letter or e-mail from the Hospital's Chief Executive Officer or Chief Financial Officer outlining cash outgoings in relation to LSL as compared to the LSL funding provided.

8. The claim should be computed as follows using audited financial data found in the Hospital Annual Report.

Salary and Wages - HSA $xxx
Salary and Wages - Non HSA $yyy
Total Salary and Wages @ 1.8% (a) $xx
Less: LSL Paid (b) $yy
Difference (to be claimed if (b) is greater than (a)) (b) - (a) $zz

 

Please note that the claim attracts GST.

9. Metropolitan Health & Aged Care Services Division (MH&ACSD) will verify Hospital claims and liaise with Hospital personnel to clarify any discrepancies that might emerge during the verification process.

10. Following approval of claims by DHS, payments will be made to the bank accounts nominated by Hospitals. Hospitals will be advised as to the amount and dates of payments.

11. In future financial years, Hospitals will be required to reduce the amount of their claims by the accrued surplus of funding where funding provided (i.e. 1.8% loading of salaries) exceeds LSL cash outgoings for LSL. To assist in this process, MH&ACSD will accumulate data relating to Hospital cash outgoings in relation to LSL as compared to funding provided.

12. For the accounting treatment of the funding received relating to the excess cash outgoing in relation to LSL, Hospitals are referred to Publication 12/2002 entitled 'Accounting for Long Service Leave' dated 28 May 2002.

13. If you require further information on the process of claiming cash on LSL settlements please contact Victor Liew, MH&ACSD on (03) 9616 7450 or by email victor.liew@dhs.vic.gov.au.