NZ payroll: Tracking leave liability provisions in pay run journals
Back in December 2019, I wrote about KeyPay’s ability to automatically track leave liabilities in journal entries in the Australian product.
Ironically, before we knew that COVID-19 would change the world, and before international travel was banned for Aussies and Kiwis, I boasted about my 2 big trips to Europe in 2019 causing me to have no accrued leave left. Oh how times have changed now - all of my 2020 holidays were cancelled, and I now have so much leave I don’t know what to do with it!
At risk of sounding like a spoilt brat complaining about my first world problems, my newly acquired leave balance does bring a valid point to this blog post. With travel being fairly unheard of in 2020, many employees will have racked up quite a lot of accrued leave. This means that if they were to leave their role, some leave balances would need to be paid out to them upon termination. These owed leave types would be classed as leave liabilities - and these could be a big cost to a business if not monitored well.
The benefits of monitoring leave liabilities
It’s useful for business owners to know the amount of leave required to be paid out to an employee if they leave, so they can budget accordingly. It’s also useful for when businesses sell, as new owners like to see liabilities and expenses to the business. Leave liabilities are ultimately a cost to the business that business owners should always be aware of - so the visibility of these is super useful in business reporting.
Ability to journal leave liability provisions for KeyPay NZ
Many businesses like to have their employees’ up to date leave liabilities reflected in dollars in their balance sheet or general ledger to help keep track of leave liabilities each pay day. The KeyPay team has been busy working on building this into KeyPay NZ so users don’t have to manually calculate and journal leave liability figures into their balance sheet to keep them up to date.
KeyPay supports posting journal entries of leave accrued, and allows you to automate this process, by configuring the Chart of Accounts to map leave liability and expense GL accounts. Once mapped, your payroll journals will then include the associated cost of selected leave liabilities on a per pay run basis.
What leave types are included?
Examples of leave liabilities include (but are not limited to):
- Annual holidays;
- Alternative leave;
- Holiday pay 8%.
Why is tracking leave liabilities especially important for NZ payroll professionals and businesses?
The nature of how leave is calculated in NZ with AWE/ADP means that the liability for a business can change each pay run. If an employee is paid a bonus in one pay run their rate at which leave is paid out will change immediately. If an employee’s work pattern changes, their rate at which leave is paid out will also change.
Because leave does not accrue per pay run, the 8% holiday provision that "builds up" instead is something that businesses should be aware of and be able to budget for. Having this liability in a business' balance sheet will provide a more accurate picture of costs outlaid to the business.
The above factors make it hard to "budget" for leave liabilities without it being added to the balance sheet in real time.
Where the leave liability report is able to paint a picture of liabilities, this feature will now ensure it is recorded in a business' balance sheet so they are more informed of actual costs to the business.
See our support article for more information on setting up the provision for leave liabilities in payroll journals.