Accounting

The Steps Involved In Long Service Leave Measurement

Long-term employee benefits that are provided to employees during the period of their employment. A common form of long-term employee benefits is long service leave, which is a paid absence after the employee has provided a long period of service to the organization, such as 3 months of paid leave after 10 years of continuous employment. There are certain steps involved in the measurement of a liability for long service leave.

The steps involved in the measurement of a liability for long service leave :

1. Estimate the number of employees who are expected to become eligible for long service leave. The probability that employees will become eligible for long service leave generally increases with the period of employment. For example, if an entity provides long service leave after 10 years of employment, the probability that employees who have already been working for the entity for 7 years will continue in employment for another 3 years is very high, as the closer proximity to long service leave entitlement provides an incentive to employees to stay with their current employer. Thus, the proportion of employees who are expected to become eligible for long service leave is usually calculated separately for employees with different levels of prior service.

2. Estimate the projected wages and salaries at the time that long service leave is expected to be paid. This step involves the application of expected inflation rates or other cost adjustment rates over the remaining period before long service leave is paid.

Applying an estimated inflation rate:
Projected salaries = current salaries × (1 + inflation rate) n
where n = number of years until long service leave is expected to be paid.

For example, for employees who have 3 years remaining before long service leave is expected to be paid, current salaries are projected over a period of 3 years.

3. Determine the accumulated benefit. The projected unit credit is determined as the proportion of projected long service leave attributable to services that have already been provided by the employee.

4. Measure the present value of the accumulated benefit. The accumulated benefit is discounted at a rate determined by reference to market yields on high-quality corporate bonds, in accordance with paragraph 83. If the country in which the long service leave entitlement will be paid does not have a deep market in high-quality corporate bonds, the government bond rate is used.
liability for long service

The liability for long service leave is a provision. After determining the amount of the obligation for long service leave at the end of the period, following steps 1 to 4 above, the provision is increased or decreased as required.

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