Issue number:
13/2001
Date Issued:
14 Jun 2001
Issued to:
Public Hospitals
Purpose:
To confirm the accounting treatment for the funding of the net liability movements for Long Service Leave

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

Note:Discussions are being held with DTF and the Auditor General to enable a similar treatment with respect to Annual Leave. Separate advice on this will be provided.

Accounting for LSL

As 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 the excess cash outgoing. This will commence 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) (a) 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, the entries could be represented as follows:

Hospital XYZ began the financial year with an opening LSL leave liability of $10million and a June 2001 year end 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 Friday 6 July. (note: DHS will provide payroll suppliers with the bond and wage inflation factors on Monday 2 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 would be payroll system data, to be made available to DHS on request.

The DHS contact for agencies to supply information by COB Friday 6 July is:

Mr. Duncan McColl
Manager Financial Reporting
Phone: 9616 8316 Fax: 9616 7152
Level 15 555 Collins Street, Melbourne.
Preferred method of delivery is by email at:duncan.mccoll@dhs.vic.gov.au

Lance Wallace
Director
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