Accounting for annual and long service leave

It is fair to suggest that accounting for annual and long service leave is one of the more cryptic entries when balancing the books. The money is in the bank account yet recorded as an expense against operating profit—a bit like a ghost ship aimlessly floating on the high seas getting in the way of trade routes. The financial facts on annual and long service leave are clear. Firstly, they need to be provided for by law, and just as importantly, the organisation must understand its financial position to ensure stability in the future.

We’ve all heard of it and, at some point, taken advantage of it. The simple explanation is that every day a staff member works, they accrue a portion of annual and long service paid leave. At some point, this accrued paid leave will need to be honoured, and leave entitlements accrue quickly over time. It is worth noting that the NFP sector is one of the more stable when it comes to staff retention, primarily due to its mission culture that resonates strongly with its employees.

The leave portion of an individual’s employment is a legal financial obligation. If leave is not tracked correctly, the NFP risks not meeting its financial and employment requirements should a staff member resign or leave at the organisation’s request.

Dianne has worked for NFP A for the past six years and has done an amazing job with fundraising activities. Due to personal circumstances, Dianne resigns suddenly to pursue opportunities in another state. Over her tenure, Dianne has accrued over 20 days of unused paid annual leave entitlements amounting to several thousand dollars. Dianne is entitled to this money in her final payroll and it must be paid by NFP A. If NFP A hasn’t budgeted for unused annual leave and hasn’t set aside funds it will face a cash shortfall. The shortfall may risk financing ongoing program delivery or paying suppliers and other costs such as rent or utilities, causing reputational damage and financial stress.

By maintaining regular oversight, professional budgeting, and accounting for leave entitlements, NFP A has sufficient funds to fulfill its obligation to Dianne without harming the financial integrity of its operation.

Long service leave is tricky and often an invisible liability when not accounted for. The differing rules between states and territories in Australia add to its complexity, which complicates budgeting if an NFP operates across different jurisdictions. For example, LSL kicks in at 10 years of continuous service in NSW and after 7 years in Victoria. The entitlements are different in different states and territories. In South Australia, employees receive 13 weeks of paid LSL after 10 years of continuous service in Western Australia, it is a touch over 8.5 weeks. Pro ratas and additional leave throw a few more spanners into the mix.

When you add portable LSL, a scheme in Victoria, The ACT, and Queensland that allows workers to carry their LSL entitlements across employers within the same industry, accounting for LSL requires professional and qualified accounting oversight.

There is no standard federal formula for LSL; another pothole we regularly see is time. Nowadays, 7-10 years feels like a lifetime, and some people have 2 or 3 different careers in that timeframe. Thinking this way is a trap, and ignoring the LSL obligation can have dire consequences.

Think of it this way:

James is a well-respected project manager who has worked at NFP B for over 10 years. He is now entitled to long service leave and has decided to move on from NFP B after a solid decade of commitment. NFP B must pay his LSL entitlement which can be in the tens of thousands of dollars.

If NFP B has not accounted for or budgeted for James LSL, this lumpsum puts service delivery at risk. It can quickly blindside a budget and put NFP B in a more than awkward situation.

We work exclusively with the NFP sector and the issue of annual and long service leave is one of the more talked about financial obligations. Being prepared and understanding the intricacies and how annual and LSL affect your NFP’s financial position is essential. The team at Accounting for Good has put together the checklist below we hope you will find helpful.

• Ensure leave is part of the payroll set up each time a new employee starts. If it is not there, why not?
• Ensure leave liabilities are part of your regular review.
• Ensure you have set aside funds and have the money on hand to pay any annual or LSL entitlements. Having this cash in a dedicated account can be helpful in quarantining funds.
• Know your state or territory LSL requirements and make provisions for any employee that falls under the portable LSL scheme. If you operate across various jurisdictions, it is highly advisable to seek professional advice.
• Ensure all high-level stakeholders, including the board and management, have a clear and transparent understanding of annual and LSL entitlements and factor these into any budgeting decisions.
• Seek professional advice. Working with a qualified professional accountant is the most secure method of ensuring compliance and mitigating risk.

At Accounting For Good, we work with NFP organisations with a turnover of $1M or more.

Contact us for a free consultation if your organisation needs expert financial guidance. Let us handle your accounting needs so you can focus on what matters most—serving your community and driving positive change.