Issue number:
16/2004
Date Issued:
01 Jun 2004
Issued to:
Public Hospitals, Denominational Hospitals & Ambulance Services
Purpose:
To confirm and update the accounting treatment for the funding of the net liability movements for Long Service Leave

This Circular replaces Circular 12/2002, which was issued on 28 May 2002. The amendments relate to:

  1. Calculation of Provision for LSL as at 31 May
  2. Clarification on DHS information requirements
  3. Detailed examples for accounting for LSL eg. net decrease in LSL
  4. Portability of LSL

This Circular consists of three parts:

  1. Submission Date: The calculation of LSL debtor as at 31 May rather than 30 June.
  2. Accounting for LSL: provides accounting treatment for the funding of the net liability movements for Long Service Leave.
  3. Claim for Additional Funding: details information in relation to the claim for funding in excess of 1.8% loading.

(A) Submission Date

In early 2004, the Department of Treasury and Finance (DTF) instigated a project to accelerate the delivery of Victoria's Annual Financial Report, thus requiring the calculation of the LSL debtor as at 31 May. To this end, the wage inflator and discount rates for Long Service Leave will be issued on 1 June to enable agencies to submit LSL returns by the 7 th working day of June.

In years where there is uncertainty about the results of any Enterprise Bargaining Agreements under negotiation, it may not be possible to engage an actuary to calculate an industry specific wage inflator rate. In these cases, such as for 2003/04, the DTF wage inflator rate will therefore apply.

DTF will make available the LSL wage inflator and discount rate on the DTF website (Select the following links: Information for Victorian Government > Policy & Compliance > Financial Management Package).

Submission Process

  1. Obtain the wage inflator and discount rate as at 31 May from the DTF web site.
  2. Obtain LSL entitlements (from payroll provider) as at 31 May.
  3. Calculate LSL provision.
  4. Submit LSL return to DHS by 7 th working day in June.
  5. Review LSL calculation at 30 June if any of the following events:
    • DTF re-issuing wage inflator and/or discount rate;
    • Change in salary and wage rates;
    • Large changes in LSL entitlements eg. unusual number of staff taking long service leave or becoming eligible for LSL entitlements.

If so, resubmit return based on 30 June data by 7 th working day of July.

(B) Accounting for LSL

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 (including denominational hospitals) and ambulance services. These agencies are required to record a net increase in the LSL liability as revenue and DHS as a debtor. Should a net decrease occur, the reverse is applicable i.e. decrease is recorded as an expense to the extent of revenue previously taken up and DHS as a creditor.

At the introduction of casemix DHS included a loading of 1.8% of salaries for LSL cash settlement purposes and this loading has continued to be applied in funding for subsequent award increases. 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 2000/01 based on year-end results (Part (C) contains details on how to claim additional funding).

The following are recommended accounting entries for hospitals (including denominational hospitals) and ambulance services and AFR account numbers for the preparation on SRC templates for Annual Financial Report (AFR), Mid-Year Financial Report (MYFR) and Quarterly Financial Report (QFR) (except for denominational hospitals).

The account number and accounting entries for the cash component are as follows:

On payment for leave taken or paid in lieu:

(1)(a)

A35200 (CL) or

A42250 (NCL)

DR

LSL Payable within 12 months or

LSL Payable after 12 months

A10400

CR

Cash on Hand and Other Bank Accounts

On recognition of services delivered (casemix payment):

(1)(b)

A10400

DR

Cash on Hand and Other Bank Accounts

A74500

CR

G rants from GG Sector Departments - Within Portfolio

The account number and 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 AASB 1028 Liability:

Increase in LSL provision

(2)(a)

A80500

DR

LSL Expense

A35200 (CL) or

A42250 (NCL)

CR

LSL Payable within 12 months or

LSL Payable after 12 months

OR

Decrease in LSL provision

(2)(a)

A35200 (CL) or

A42250 (NCL)

DR

LSL Payable within 12 months or

LSL Payable after 12 months

A80500

CR

LSL Expense

On recognition of non-cash services delivered:

Increase in net LSL leading to increase in debtor or decrease in previously recognised creditor

(2)(b)

A16700 or

A30600

DR

Other Receivables or

Accrued Grants & Transfer payments

A74500

CR

Grants from GG Sector Departments - Within Portfolio

OR

Decrease in net LSL leading to decrease in debtor or increase in previously recognised creditor

(2)(b)

A74500

DR

Grants from GG Sector Departments - Within Portfolio

A16700 or

A30600

CR

Other Receivables or

Accrued Grants & Transfer payments

 

Example A.1 - Increase in debtor

Hospital XYZ began the 200X 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:

Year 200X

Opening liability balance

$10M

Less Cash paid in LSL for the year

$ 3M

Remaining liability before current year liability reinstatement

$ 7M

AASB 1028 calculated liability increase

Normal increase in entitlements

$3M

Increase due to increase in award rates

$2M

Change due to bond/wage inflation adjustment

$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 Payable within/after 12 months

$ 3M

CR

Cash on Hand and Other Bank Accounts

$ 3M

(1)(b)

DR

Cash on Hand and Other Bank Accounts

$ 3M

CR

Grants from GG Sector Departments - Within Portfolio

$ 3M

(2)(a)

DR

LSL Expense

$ 8M

CR

LSL Payable within/after 12 months

$ 8M

(2)(b)

DR

Other Receivables or Accrued Grants & Transfer Payments

$ 5M

CR

Grants from GG Sector Departments - Within Portfolio

$ 5M

Note: 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.

Running down the debtor can result in a creditor balance if the amount of the negative non-cash liability movement or additional cash revenue exceeds the debtor amount. The creditor balance can be extinguished with net increases in the LSL liability in subsequent years.

Example A.2 - Decrease in debtor

In 200Y, Hospital XYZ had an opening LSL leave liability of $15 million and ended the year with LSL liability of $9 million. The net movement is a decrease of $6 million represented by:

Year 200Y

Opening liability balance

$15M

Less Cash paid in LSL for the year

$ 8M

Remaining liability before current year liability reinstatement

$ 7M

AASB 1028 calculated liability increase

Normal increase in entitlements

$3M

Increase due to increase in award rates

$2M

Change due to bond/wage inflation adjustment

($3M)

$ 2M

Closing liability balance

$9M

Net Movement -$6M ie. $9M less $15M

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

(1)(a)

DR

LSL Payable within/after 12 months

$ 8M

CR

Cash on Hand and Other Bank Accounts

$ 8M

(1)(b)

DR

Cash on Hand and Other Bank Accounts

$ 8M

CR

Grants from GG Sector Departments - Within Portfolio

$ 8M

(2)(a)

DR

LSL Payable within/after 12 months

$ 2M

CR

LSL expense

$ 2M

(2)(b)

DR

Grants from GG Sector Departments - Within Portfolio

$ 6M

CR

Other receivables or Accrued Grants & Transfer Payments

$ 6M

The debtor balance of $5M recognised in 200X will be run down in full by the net decrease of $6M in 200Y, resulting in a creditor balance of $1m ($5M-$6M), which would require DHS being recorded as a creditor.

Accounting for Cash Revenue Related to Excess Cash Outgoing

The account number and accounting entry to recognise payment of additional cash revenue claimed in (C):

A10400

DR

Cash on Hand and Other Bank Accounts

A16700

CR

Other Receivables

Portability of Long Service Leave Relating to Transfer of Employee between Applicable Agencies

As per the deliberations of the Hospital Urgent Issues Group and as advised in the Business Rules B2, where employees transfer from like agencies and transfer their entitlements the transferee Hospital/Health Service is not obliged to pay the new agency the entitlement that would have been otherwise paid to the employee.

Any increase or decrease in LSL provisions due to transfer of staff will be reflected in the net movement of LSL provisions of each entity and therefore will give rise to a corresponding increase or decrease in DHS debtor balance which will enable a claim for cash settlement if and when required.

DHS Information Requirements

DHS requires details of the liability calculation to establish reciprocal expense and creditor entries in the DHS financial statements. Details are required by COB 7th working day of June.

Data provided to DHS should be provided in the following pro-forma format:

Pro-forma for LSL Return

Hospital XYZ

Opening Balance 0X/0Y

a

Less Cash paid in LSL for the year

b

(a-b)

Calculated Increase/(Decrease) in Provision #

c

Closing Balance 0X/0Y *

(a-b+c)

Salaries Paid 0X/0Y**

$xxx

DHS Debtor/Creditor Balance at 1 July 200X

$YYY

# This is the aggregate of normal increase in entitlements, increase due to increase in award rates and changes due to bond/wage inflation adjustment.

* Total LSL Provision at year end

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

Note: The provision of this information is not synonymous to a claim for additional funding. Where cash outgoings in relation to LSL exceed funding provided Hospitals should submit a separate written claim to Metropolitan Health & Aged Care Services (refer to (C) Claim for Additional Funding below).

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 7th working day of June is:

Manager, Financial Reporting
Level 15, 555 Collins Street, Melbourne 3000
Phone: (03) 9616 8316 Fax: (03) 9616 7152
Email: reporting@dhs.vic.gov.au

(C) Claim for Additional Funding (Cash outgoings in excess of funding provided in relation to LSL payments) - Explanatory Notes

  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 subsequent award increases.
  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 2000/01 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
    Level 17, 555 Collins Street, Melbourne 3000

  6. 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.
  7. The claim should be computed as follows using audited financial data found in the Hospital Annual Report.

LSL Claims in Excess of 1.8% Provided in Hospital Funding

Salary and Wages - HSA

$xxx

Salary and Wages - Non HSA

$xxx

Total Salary and Wages @ 1.8%

(a)

Less LSL Paid

(b)

Difference*

(b)-(a)

* To be claimed if (b) is greater than (a). However, this claim must take into account any LSL funding in excess of 1.8% of total salary and wages in previous years commencing from 2000/01.

# Please note that the claim attracts GST .

  1. 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.
  2. Following approval of claims by DHS, payments will be made to Hospitals standard bank accounts used for HSA payments. Hospitals will be advised as to the amount and dates of payments.
  3. Claims for 2003/04 and for each subsequent financial year should be submitted by 29 October of the following financial year. For example, claims for 2003/04 should be made no later than 29 October 2004. No late claims will be accepted.
  4. 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.
  5. Refer to (B) for the accounting treatment of the funding received relating to the excess cash outgoing in relation to LSL.
  6. 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.

Lance Wallace
Executive Director
Financial & Corporate Services