Company's Fascination over Large Leave Balances

random12 on 07/12/2021 - 20:45

One thing I have never quite understood is why company's are so worried about large leave balances, and more so during COVID.

Hasn't anyone taken a class in accounting? The expense is recognised when the work is done, not when the leave is taken. The fact that a company has $x in leave liability means nothing, because they also have $x on the asset side of the balance sheet in cash that would have to be paid if employees took all their leave today.

The only time I can see it making a difference is if an employee gets a raise. Say they go from $50k to $60k, that means the value of the leave has increased by 20%. But other than that, there is no difference. Or its that increase that they all worry about? If that is the case, why don't they build into contracts that leave balances translate into an equivalent $ amount on job changes?

Education & Work

Comments

  • TheBird on 07/12/2021 - 21:36

    Part of it is that extra cost after a raise (and you can't contact it, from what I understand, that's against the law), but part of it is the health of the employee. A burnt out employee reduces their effectiveness.

  • Smiley82 on 07/12/2021 - 21:38
    +3

    Many companies will budget leave assumptions into their annual budget process.

    I.e, assume staff will take 3 of their 4 weeks each year. Therefore they adjust their model for a salary of 49 weeks and 3 weeks annual leave. If staff don’t then take their annual leave, they will be over budget, so they will ensure managers manage their staff leave balances accordingly.

    • Realsteel on 09/12/2021 - 17:54

      one of the primary reasons why people are forced on leave in certain organisations. Many organisations budget for 4 weeks annual leave to be taken. Apart from managing liabilities, risk of increase in liabilities due to increase is payrates - budgeting (cost management) is a HUGE factor!

  • poboy on 07/12/2021 - 21:42
    +1

    1. Companies need time to audit the work of people to uncover fraud (not always applicable).

    2. Leave is accrued at today's wage put paid out at potentially a later higher wage, thereby representing a growing liability.

    3. If people leave, the company has to pay it out.

    4. Rested workers are happy workers.

  • KingJunior12 on 07/12/2021 - 21:48
    +6

    Two reasons
    1. Companies want to manage their cashflows. Having large outstanding current liabilities is usually a small red flag to potential buyers/banks/financers that such a business could be unable to meet covenants etc.
    2. Fraud is easier to discover when people take their leave; If someone doesn't take leave for years, it's easier to cover their tracks. If employees are forced into taking leave and someone assumes their role whilst they're away, it's significantly more likely their fraud will be discovered. It's well documented in Sarbanes Oxley material.

  • freefall101 on 07/12/2021 - 23:57
    +12

    If you hire someone, they work for 52 weeks then quit, you pay out that 4 weeks leave. They have cost you 56 weeks of pay for that period.

    Leave is seen as a good thing to take, it stops burnout, reduces sickness, helps identify problems when that person is away and just generally helps people recharge. If they're not taking it they're probably not as productive and may be not as productive while also costing you more. Plus people get the same amount of work done in those 48 weeks anyway, they tend to do a tonne of work before taking leave then catch up when they get back.

    As others have mentioned, leave entitlements are more risky to have on the balance sheet, payroll liabilities are paid out before loans. The balance increases with pay rises (I had a job once where I could both purchase and cash in leave. It was common to purchase it prior to pay rises then cash it back in afterwards, don't give your accountants opportunities like that).

    Using large leave balances is also disruptive to the business. It's much harder to deal with someone being away for 8 weeks once every 2 years rather than 1 week every 3 months.

    Basically, there's zero benefit to the business to allow people to rack up leave so they don't. End of story.

    • random12 on 08/12/2021 - 04:13
      -4

      This is a reasonable argument.

      However one thing I would question is the statement:

      'Plus people get the same amount of work done in those 48 weeks anyway'

      Maybe true in some roles where work expands to fill the time, but if you are in an operations type role, then you likely have done more work, and thus it's not necessarily a bad deal for the employer to have to pay 56 weeks.

    • Grunntt on 08/12/2021 - 11:32
      +1

      Plus people get the same amount of work done in those 48 weeks anyway, they tend to do a tonne of work before taking leave then catch up when they get back.

      You appear to be making a rather large assumption that most of the labour force is working in admin/tech/management positions.
      I believe you will find that, for the great majority of the Australian workforce, it is physically impossible to complete work in advance or catch up on return.

      If you are wondering what Australian workers are actually employed to do here's some real data for you to examine.

      https://lmip.gov.au/default.aspx?LMIP/GainInsights/IndustryI…

      • freefall101 on 08/12/2021 - 13:34

        That link doesn't split by worker type. For example the third most common job in medicine is receptionist.

        You're right, what I said was tailored to office work and definitely isn't universally true. But I didn't intend to just mean people who controller their own workflow. Hospo and retail workers will done a tonne of work leading up to Xmas then take a break after and restock stores post-Xmas, technically they can't be forced to do it that way but getting leave in either industry is impossible pre-Xmas, they're doing all the work when it is there. Construction there will be lulls between contracts where workers are encouraged to take time off or periods where different specialists are required on site, same with mining. The whole capping leave accruals is an easy way to get people to take leave when you want, the reminders always come out just before Christmas.

        Definitely not always true, when I worked in a role that had billable hours I was encouraged to take as little leave as possible, in order to keep my billables high. Some industries use casuals for the reason that they have no accruals on the books and the cost is directly associated to when they're working. Others will simply hire and fire people based on current requirements rather than plan out the workforce for a year ahead. But it is a lot more common to have crunch periods than just admin.

  • reactor-au on 08/12/2021 - 09:52
    +1

    It's definitely the liability they are concerned about. My employer 15 years ago let us accrue 80 days leave. In 2015 it was reduced to 55. After the pandemic they said it was going to be reduced to 45. Obviously the squeeze of the pandemic and a large liability with 30,000 employees was a major risk.

  • MissKitten1 on 08/12/2021 - 09:54
    +1

    I've noticed that large leave balance are an issue for an organisation when they are looking at restructuring and looking at making the organisation smaller with redundancies. Otherwise, a lot of the time they don't care too much.

  • KaTst3R on 08/12/2021 - 10:11
    +3

    Pretty simple in 3 main points from a financial perspective (ignoring all the other intangible benefits from taking leave like productivity etc).

    1) If you use annual leave, liability goes down. Cash position doesnt move. When people quit, they may cash out leave and this is a risk.

    2) When an employees gets a raise, leave liability goes up due to increase in hourly rate.

    3) Larger liability affects company ratings and ability to raise more debt.

    • happydude on 08/12/2021 - 12:08
      +6

      Just on point 1 it also makes redundancy a shit ton more expensive.

      If you suffer a down turn and need to lay people off then 4 weeks v 12 weeks for a number of staff could be the difference between surviving and punching the voluntary administration button.

    • AFOS on 09/12/2021 - 21:52
      +1

      The only indeed comprehensive response here. Bravo!

  • happydude on 08/12/2021 - 12:06
    +6

    Hasn't anyone taken a class in accounting?

    Doesn't seem like it.

    You sounds like the sort of person that gets their debits and credits mixed up.

      • happydude on 08/12/2021 - 15:14
        +21

        Give the second year a crack.

          • Viper8 on 09/12/2021 - 12:52
            +4

            @random12: You're hilarious. Almost every single one of your comments is getting negged into oblivion and yet you apparently are completely oblivious to the fact that you're completely wrong. You're arguing about something you fundamentally don't understand, and your defense is you did a couple of 1st year units. Amazing! What do all those CA/CPA qualified accountants know anyway?! Maybe you should try actually listening to other people that know more than you instead of arguing against the entire world.

            • random12 on 09/12/2021 - 16:27
              -7

              @Viper8: The truth is not a popularity contest.

              Look at history. All the times when the dumb mob was wrong.

          • happydude on 09/12/2021 - 15:05
            +1

            @random12: Dude you invented cash out of thin air in your example.

            because they also have $x on the asset side of the balance sheet in cash that would have to be paid if employees took all their leave today.

            Where does this money come from? Do the leave fairies deposit it every fortnight?

            I am very low on the corporate ladder.

            And this where you will stay with your attitude. Your problem isn't what you don't know, it's that you think you are smarter than everyone else.

            • random12 on 09/12/2021 - 16:29
              -5

              @happydude: Hard to understand concepts like 'opportunity cost'? Hard to imagine alternative scenarios?

              The cash is there because IF people had taken that leave it would have previously been paid as cash, so the cash balance would have been lower than it otherwise is now.

              • happydude on 09/12/2021 - 20:45
                +1

                @random12: $60,000 p/a example.

                If you work 52 weeks of the year and take 4 weeks leave you get paid $60,000.

                If you work 52 weeks of the year, take no leave and quit you get paid $64,615.

                Where did that $4615 come from?

                • random12 on 10/12/2021 - 00:52
                  -5

                  @happydude: It came from being accrued over the year…do I really have to explain it?

                  Once someone does the work, they have earned the leave. At that point, it is effectively the employee's money, but the company is just holding it until the employee elects to take time off. The company should know to put it aside as cash, and know that they cannot use it for long term investments or to gamble.

                  Where does the extra come? Comes from working an extra 4 weeks. That's not a liquidity problem.

                  Assume a company could get 5% in a saving account and they have $100m leave liability. That is effectively revenue to them of $5m, by just holding it in an at call account instead of the employee taking time off and take it away as cash. You might wanna say "well, they dont want to only earn 5%, they wanna invest in longer and risker projects". But the point is, it's not their money, it's the employee's money. They are just holding onto it. The company should be happy they can even earn 5% on it. In the alternative situation, the employee would have that money in their hands, and the company would be getting zero benefit.

                  • ChickenTalon on 10/12/2021 - 07:52
                    +3

                    @random12: That’s not how businesses operate. They don’t put aside a dollar every time an employee accrues a dollar of annual leave. There is no legal requirement to do that and it would be inefficient to keep so much cash on hand. Keeping cash in the bank earns virtually 0%, where the hell are you getting 5% returns from an at call account?!?? You’d be getting 0.5% at absolute best. Invest that money into the business and it could earn a whole lot more.

                    And it’s not “the employees money” either. Its an employees entitlement to leave and a potential future liability should that employee quit.

                    • random12 on 10/12/2021 - 11:32
                      -5

                      @ChickenTalon: "That’s not how businesses operate" - Well, if that's how the business chooses to operate, it is a conscious decision that they make, and a risk they knowingly take.

                      I used the 5% rate purely for illustration. I realise that rates are very low now. But it wasn't too long ago (I believe 2007) where some savings rates were around 7%.

                      It is the employees money. It's not a 'potential future liability', it is a current liability. The employee has earnt it already

                      Assume that Annual Leave accumulates at 4wk/52wk. That means an extra 4/52 = 7.7%.

                      Assume your normal weekly pay is $1000/wk take home.

                      Your effective pay is 1000* (1+4/52) = $1076.9/wk.

                      You WORK 1 week, you get $1076.9 of value. Whether it is cash in hand, or time off at a later date, does not matter.

                      When you choose to take it makes no difference.

                      • happydude on 10/12/2021 - 19:12

                        @random12:

                        Well, if that's how the business chooses to operate, it is a conscious decision that they make, and a risk they knowingly take.

                        Whoa Whoa Whoa!!!

                        Are we now at a point where you understand there is a risk of high leave balances? So you get that you either need to keep cash reserves which is not financially prudently or ensure leave balances don't get too high?

                        I feel like we are on the verge of greatness!

                        • random12 on 10/12/2021 - 23:14
                          -2

                          @happydude: There is not a risk of having high leave balances specifically. There is a risk of spending something that is not yours.

                          I would love someone to give me $1bn interest free that can be recalled at any time. I can take that, and lets use 0.1% as an example savings interest rate (more realistic today). I can earn $1m interest per year just by leaving it in a savings account, absolutely risk free.

                          I have it on hand, and it can be returned at any time it is requested.

                          I could also try to make a higher return than the 0.1%. I could invest it in long term projects or go gambling with it, and it may not be available at short notice. But I realise that is a choice I am making. That is a risk I take for using someone else's money. You have the right to make maximum returns on your own money. You do not have the right to make maximum return and take risks with other people's money.

      • ddhar on 09/12/2021 - 18:03
        +1

        Good! You should revisit your papers and refresh your memory. Your knowledge has fallen.

  • norrisrules on 08/12/2021 - 12:21
    +3

    Fraud people, FRAUD!

    A large number of people in accounting who are cooking the books are caught by going on leave. Once someone fresh comes in to cover their work, all the dirty secrets come to light.

    https://en.wikipedia.org/wiki/Rita_Crundwell

    Similar thing applies to areas other than accounting too.

  • knobbs on 08/12/2021 - 14:22

    I think the biggest problem is the company doesn't want to keep the cash to pay out your annual leave. If there is some $$ in their account they want to do something with it. Sure at day1 cash = annual leave but their itchy fingers see leftover cash and want to make use of it. Therefore when you go to cash out your $$$ on annual leave they don't have the money to pay you.

  • Bjingo on 08/12/2021 - 14:24
    +2

    The issue is that it is expensed when the work is done not when it is taken. So when you journal annual leave the journal will look like;

    Dr Annual leave expense $x (expense)
    Cr Accrued annual leave $x (liability)

    then the year rolls around the expense is used to calculate profit but the liability rolls forward. If someone takes their leave the entry is;

    Dr Accrued annual leave $x
    Cr Cash at bank $x

    However as you are on leave you are not earning the company money and they are not able to expense this cost as they have already expensed it.

    Also they do not have to have an asset in cash for if the employee takes the leave the can just have the liability. This can lead to cashflow issues especially if it is cashed out but on the inverse having the cash just sitting their can cause a drop in revenue as that's money they could use on the business.

  • sassypants on 08/12/2021 - 15:56

    I believe it also has to do with budgeting, as others have touched on.
    e.g. my division is budgeted $100, with $20 put aside for leave. Nobody takes leave so I have now come in $20 under budget, but leave has accrued. Next year I am given a budget of $100 again (if not less, for not using the full amount last year) but now $30 has to be put aside for leave, meaning less to spend on other projects.

  • brad1-8tsi on 08/12/2021 - 18:35

    I work for a state government trading organisation. Since 2016 my pay has risen 70% (restructures resulting in a higher grade, new EBAs, new position, etc).
    We have 700 staff. Not all have been as lucky as me but if we all accrued leave at $300/day in 2016 and then had it paid out in 2022 at $510/day then that would be a burden on the financial forecasts for the year.

    Get to 30 days (1.5yrs leave) you have to put in a "leave plan".

    Get to 40 days and you either take leave within a month or "freeze it" at your current pay rate. You can also sell 1 week of leave per year back to the company.

    Despite all this we have people (managers mainly) who have 6 months of leave accrued.

    I don't know how people get in this situation. The firm is very flexible. In 2019 I took a day off every week for 20 weeks. It was great and I kept my leave balances low.

  • katykat on 08/12/2021 - 23:40
    +1

    Surprised no one has mentioned that it can be an OHS issue yet. Sure, the $$$ liability and balancing the books is probably the main reason, but in a lot of industries with high attrition rates and burn out there is has been a focus on the causes of that in recent years.

    If a company allows you to bank to extreme levels and then you burn out, you may have to take extended leave, quit or just not perform as well as you could. There is also the argument that encouraging leave hoarding could be a workplace safety issue. Plus liability for workplace injuries that occur - whether they be psychological from burn out or physical because your compromised performance has effected your skill. When they look at all the variables, for a lot of companies it makes $$$ sense to ensure people don't accrue excessive leave.

    Not saying every industry or company obviously.

  • p1 ama on 08/12/2021 - 23:41
    +6

    One thing I have never quite understood is why company's are so worried about large leave balances, and more so during COVID. Hasn't anyone taken a class in accounting?

    How are you questioning the accounting of big corporates whilst displaying basically no knowledge of accounting at all? Did you read about assets and liabilities somewhere and think you know everything?

    Large leave balances are a concern because people tend to want to take lots of leave around the same periods (e.g. school holidays) and having 70% of your workforce wanting to take the same periods off is very bad for contingency planning.

    But to your accounting question though (from someone who actually has studied accounting and used to work for a Big 4), the issue is not so much the balance sheet, but rather a working capital issue. When people take leave, it is not a cash flow constraint because your work output may be lower, but you are not paying out cash. However, when people resign with large leave balances that have to be paid out, it is.

    If a large number of people leave at similar times (which also tends to happen), you could end up in a bad liquidity position because of having to pay out large leave balances all at once.

    The P&L and balance sheet are rarely the most important accounting item for most businesses, net working capital is far more important to actually staying solvent.

    • spiff on 09/12/2021 - 12:13
      +3

      Bbbbbut OP got HD's in accounting units he MUST be right waaaaahhhh

  • peteru on 09/12/2021 - 02:10
    -4

    Stop being an accountant!

    When you put on you managerial hat (which is where the real decisions are made), the clues are obvious. If a key employee takes 2 weeks off, you can muddle through until they get back. If they go away for 2-3 months, you are (profanity). As a manager, you don't want important people gone for too long, so you hide behind policy and make them take smaller chunks of leave more often.

    Mod: Modified to remove foul language

    • peteru on 09/12/2021 - 02:37
      -2

      And to all of you justifying these practices with the accountant point of view, take a class in economics. In particular, examine the opportunity cost - having an employee working (not taking leave), will almost always result in more long term profit for the company than the modest indexed increase in the corresponding remuneration if the leave is cashed out later.

      In regulated industries, such as banking sector, the excuse is often that an employee needs to be taken out of the loop so that someone else can perform the job and potentially discover irregularities. This is bullsh1it because these industries (actually most companies) should be regularly audited and the auditors should be thorough and competent enough to discover any issues.

      The problem with accountants is that they (most of the time) don't have the bigger picture and strategic outlook. Their domain of expertise is presenting the existing numbers in the best light possible. As an analogy, the accountants would spend a hundred dollars of their time to get a twenty dollar deduction. A clued manager will spend a thousand dollars on bringing in hundred thousand dollars worth of new revenue.

      As far as I am concerned, accountants should have zero decision making influence. Their job is to document the business activities to comply with the regulations. At best, accountants should advise the decision makers on cash flow issues, but in reality, if those decision makers are not proactively looking at cash flow and liquidity, they probably don't deserve to be paid.

      Call me a cynic, but over the last few decades I've seen a lot of potentially good businesses make tragically bad decisions based on advice from HR & bookkeepers who only look at policies and figures, rather than understand business strategy and culture.

      • spiff on 09/12/2021 - 12:15

        Studying economics wont give you the insight into the "big picture", business strategy or culture.

  • dji1111111 on 09/12/2021 - 02:26
    +5

    Classic case of someone not very smart calling out something as pointless…
    Actually find it hard to even believe the OP has done any studies in the field of accounting and claims he's good at it when he doesn't even understand this basic concept.
    Would you like to know how big annual leave liability may grow in a large corporation and how much of a drain to cash flow it will be should they need to restructure etc and end up making a lot of people redundant at the same time?
    Most companies also true up their annual leave balances periodically and the liability will only grow as people's salary usually goes up over time

    • peteru on 09/12/2021 - 02:52
      -6

      Classic case of someone not very smart calling out something as pointless

      Maybe. Maybe not. At least I'm qualified with a Masters degree in Business (no, not just an MBA) and more than three decades experience across a range of industries, including institutional banking. I know how the real world works and I've seen plenty of failures to recognise warning signs and patterns. Just about every organisation that steers their decision making process based on the balance books is high risk. A healthy culture and strong management (which are invisible through the accounting lens) are the real indicators of success.

      But, hey, if you think that bean counting is your recipe for success, go ahead and enjoy your pocket calculator.

      • dji1111111 on 09/12/2021 - 08:42
        +8

        A lot of gibberish and non relevant talk lol
        What did you smoke last night?
        Nobody here is talking about how organisations make decisions lol
        We are talking about why companies are concerned about large accrued leave balances and you come here talking about something completely different.

        Haha typical misconception that accounting is about just calculating stuff on calculator. Are you from the 60s? Oh right. You said 30 year experience so you are pretty old and don't even know what accountants in a commercial environment do these days. Time for you to self reflect and see if you really know what you are doing or if you are just stuck in the 60s.

        Wtf is balance books anyway? Lol

      • dji1111111 on 09/12/2021 - 08:45
        +3

        Oh I see. You are technologically challenged and you thought I was replying to your comment lol
        Dude, I was replying to OP and didn't even bother reading your irrelevant post about accountants which is completely wrong anyway

        • ThithLord on 09/12/2021 - 09:15

          Hey, why are you singling me out?!

          Reminds me of this lol

    • buckethat on 09/12/2021 - 21:45
      +1

      He's clearly got all the answer. He did accounting.

      Makes you wonder why he's

      very low on the corporate ladder.

  • peterpaoliello on 09/12/2021 - 08:07
    +11

    Confidently incorrect.

  • trapper on 09/12/2021 - 09:16

    Companies have to give you your holiday pay, they can't change that, so that's cost they can't avoid. It's either now or when you leave, but it will be paid.

    Is there any upside for companies? Sure, employees come back from their holiday rested, refreshed, happier and more productive at work.

    So of course they want a piece of that upside too. There is no upside to paying out a lump sum when an employee leaves.

  • keejoonc on 09/12/2021 - 10:38
    -1

    Now everyone thinks they are accountants. Thanks OP.

  • Mikeer on 09/12/2021 - 11:01

    You can work through this problem yourself in just a few minutes.

    • Let's say we hire 1 person full-time on a 100k/year package. We expect that annually we will get 1,840 hours of work out of this person.
    • That person does not take leave and works the full 2,000 hours every year.
    • The person leaves the company 5 years later and we have to pay them for 100 days of leave they never took. Instead of costing us 500k, employing that person cost us 540k. This is more than what we budgeted for.
    • That person did indeed work more hours, but we planned to get 9,200 hours of work from that person, and by not taking leave, we were forced to pay them for 10,000 hours.

    You could argue that although that person ended up costing more, they also put in more work, therefore they could hire fewer people, but firstly, not all jobs scale that easily, and more importantly, employers plan to get a certain amount of work out of people for a certain amount of money.

    How would you feel if your local restaurant increased their portion sizes by 25%, and increased menu prices by 25%?

  • burningrage on 09/12/2021 - 11:09
    +2

    Wow. What a very long thread….

    Too big accrued leave liability is bad for a business because if the company is to fold, that's the liability they have to pay to people and if you don't have the cash to pay for it, it's even worse for you as employees.

    You can have zero cash at bank but $1m in (potentially illiquid) assets with $1m in accrued leave liability and you are screwed if the company folds.

    Also if your pay goes up, the accrued leave liability suddenly needs to be revalued upwards and that's additional liability. If you never take any leave and never had a payrise from 1980 and suddenly you got promoted with 200% payrise, the company's liability for that 30 years of unused leave on you would suddenly shoot up drastically, dramatically increased the company's exposure on your leave liability. Times hundreds of times to account for number of employees and you should be able to see why it's bad for the business.

    Lastly, if your company hypothetically shuts down (eg: COVID) and everybody uses Annual Leave, that's significant cost reduction to the company (although you would still accrue new annual leave while you are on annual leave and paying super). Many company uses this to help "balance" the fluctuations in profitability to better match the seasonality of revenue pattern.

    • Dalton on 09/12/2021 - 15:43

      I agree. I think your 'lastly' point is the whole point! When an employee takes leave, their company pays them from the money allocated for leave. This allows them to bank the employee's normal pay.

      Most managers feel that an employee can take leave without significantly affecting the output of their team, so there's no loss to them, at least in the short term.

      It's not about OOS, 'everyone wanting to take leave at the same time', or the cost of pay increases on leave balances.

  • BrokenChairs on 09/12/2021 - 11:53

    Might not be a significant financial burden but it is a risk for workforce management (large numbers of staff taking significant leave at once) and a OHS risk (taking a break is good for your health/work-life balance)

  • drfuzzy on 09/12/2021 - 12:53

    If the OP waves his/her right to carry over leave balances into the next year then OP is correct. Until then, leave is a liability.

  • CommuterPolluter on 09/12/2021 - 13:13

    Well in COVID a lot of companies are short on work… great time for people to take leave, as company may otherwise be paying them to sit around twiddling thumbs…..

  • foolsgold on 09/12/2021 - 13:54
    +1

    im sure this is mentioned above somewhere, but as an owner of a small business, the problem is resourcing.

    if I have a staff member with too much leave and they want to take it all at once how do I resource their projects. clients may have signed up to a project with a particular person giving them expertise and that could put the project in jeopardy too, etc. also the liability thing as said above.

    also with covid lockdowns, all employers are expecting all their employees want to take time off at once as soon as they can, leaving with us with no staff. although there is money in the bank to pay it, we need staff outputting the work to get cash in so the business can pay its expenses and survive.

    • Hangryuman on 09/12/2021 - 13:59

      agreed - with the two points - liability risk and resources risk

  • serbpie on 09/12/2021 - 14:19

    I'm sure I'm near the top of the reports with 20 weeks of leave

  • jv on 09/12/2021 - 14:21

    One thing I have never quite understood is why company's are so worried about large leave balances

    If you don't get a pay rise, then it's not as bad…

    If you get promoted or get a pay rise, that increases the liability of all the banked up leave.

  • jv on 09/12/2021 - 14:22

    Hasn't anyone taken a class in accounting?

    Accountants have.

  • PurchaseAnxiety on 09/12/2021 - 14:37
    +1

    You have to remember that it wasn't that long ago that COVID was almost an entirely unknown factor. Businesses didn't know what was going to happen, and they had to play it as safe as possible. Companies were suddenly seeing less work, as well as having tonnes of employees cancelling leave. So you've got reduced cash flow combined with an increasing financial liability. You might think your three weeks of banked leave isn't that big of a deal but multiply that by the whole company and add in the long termers that have accrued months of leave, and suddenly you've got growing financial burden looming. It was also perceived (though not realistic) that the pandemic may be 'over' within a year or two. In that case, would you have the opposite problem where your business is probably picking up, but a good chunk of your workforce wants to go overseas again on the 2 months of leave they've accrued. There's risk all round in letting people hoard leave, and whether we like it or not as employees, it's in the company's best interest to manage that risk.

  • Fobsessive on 09/12/2021 - 14:43

    on-cost factors applied to leave liabilities

  • juzza87 on 09/12/2021 - 14:53

    Leave is paid time away from work which you accrue while working. The same way your super is earned but you don't immediately see the benefit of it in your bank account. It has the property that it's an amount of time and not a dollar value, and yes it increases in dollar value over time.

    As such your suggestion that employers should reduce the value of the leave as pay increases means the employer is stealing time which is owed to you.

  • bman20 on 09/12/2021 - 15:15

    Hasn't anyone taken a class in accounting? LOLLLL. Before I answer your question, i love this phenomena where dumb people try and be condescending while all they are doing is exemplifying just how dumb they are. To flip the question, have you ever run a business or managed a team? Clearly not.

    A graduate accruing leave and taking it once their salary has increased is not to be balked at, it is a significant risk.

    The other aspect is around running a business. If a business has many staff with significant leave balances, these staff can take leave at times that are highly detrimental to the business. Businesses cant have employees take a month off here and there with only 6 weeks notice, it is an enormous risk. You should be flattered that your business is concerned about your leave balance - if they are not it likely suggests you are replaceable and that they are not worried by you taking an extended amount of time off at relatively short notice.

  • TheBean on 09/12/2021 - 16:13
    +1

    OP must be trolling LOL

    Legitimate and logical answers that he's not buying. But I guess got to be accepting of all views.

    • random12 on 09/12/2021 - 17:31
      -3

      Even have to be accepting of the correct view every now and then

  • random12 on 09/12/2021 - 17:20
    -6

    Keep getting all the predictable comments about 'how could you know accounting, don't you know cashflow, etc'.

    I will simpify it.

    Leave liability for a company is essentially an interest free loan. If it weren't for the liability, their cash balance would be that much lower. Now, its probably not worth much now with very low interest rates, but imagine you could get 5% in a savings account. That means the company gets 5% for nothing.

    Yes, the company cannot invest that money long term, and they can't gamble it at a casino, but just the simple act of keeping in a bank account earns a reward they otherwise would not have got.

    With regard to value of existing leave changing when a person's salary changes. That was not me 'not buying' arguments. That is me just genuinely questioning things, but I guess I should know to not expect too much critical thinking from others.

    • burningrage on 09/12/2021 - 19:05
      +4

      You are mistaken!

      Accrued leave liability is definitely not an interest free loan. It is an impost levied upon employers as an entitlement for an employee.

      The truth is you get paid 13 mths for 12 mths of work if you take it at your work anniversary.

      It is not a loan. The company doesn't get any cash or economic benefit from accruing annual leaves.

      If it is possible I am sure if given a choice most employers would not be having any accrued annual leave at all.

      • random12 on 09/12/2021 - 20:52
        -2

        It is an interest free loan.

        (1) It's something that they have to pay in the future. So it's a loan, because it has not been paid yet.

        (2) The amount they have to pay does not increase ( just ignoring the possibly of a salary increase for the moment ). So it has no interest.

        I did not mean it's literally an interest free loan, and is labelled 'interest free loan' but it has the same characteristics.

        • SoapyWooder on 09/12/2021 - 21:18
          +3

          Lol

        • ddhar on 09/12/2021 - 21:57
          +2

          Liabilities can include loan debts ,annual leave liability and many more. You are getting your classifications mixed.

          You need to stop making things up.

          • random12 on 09/12/2021 - 23:24
            -2

            @ddhar: It is effectively an interest free loan.

            I don't care about strict definitions and 'classifications'. I care about practical realities. It behaves like an interest free loan, so it is one.

            I am not arguing with u anymore.

            • SlickMick on 10/12/2021 - 09:49

              @random12: Excellent decision (about the giving up on arguing, not the not caring about accounting - that part is really bad).

          • Kinjiru on 09/12/2021 - 23:31
            +1

            @ddhar: OP did some accounting classes so he can now create his own accounting treatments and rules! I've read this thread and have been continuously amazed how OP asked a question but is not prepared to listen to the answers.

        • burningrage on 10/12/2021 - 10:02

          (1) It's something that they have to pay in the future. So it's a loan, because it has not been paid yet.

          What economic benefit does an employer get for having a "loaned" Accrued Leave Liability? If you say it's for right to hire the expertise and labour of a person, I would say that would be salary and wages expenses. Annual leave expense is IN ADDITION to salary and wages and would be the DR side and Accrued Annual Leave would be on the CR side. Accrued Leave Liability is therefore a PROVISION.

          (2) The amount they have to pay does not increase ( just ignoring the possibly of a salary increase for the moment ). So it has no interest.

          But that is an impossible scenario. You cannot ignore the possibility of salary increase and even say if you do ignore them (say you run a company with fixed employee numbers and never have a pay rise), the balance keeps rising as you effectively have to provide an EXTRA one month for every twelve months of work. Recall an employee effectively gets paid 13 months for 12 months of work if you take annual leave at anniversary.

          So if the employees don't take that annual leave and leave it banked, it doesn't absolve your responsibility to provide that extra month of pay presented as annual leave provision/accrual. Over time, that banked leave will keep rising and if your cash at bank don't keep up with that, it could be problematic.

  • GuitarXXX on 09/12/2021 - 18:28
    +4

    Corporate accountant here, there can be different reasons but 2 main ones:

    1. more leave taken = less leave expense recognised in this period, making financial statements looking better. This is usually a leaver used by management / CFOs to reach financial targets

    2. more leave taken = reduced liability on the balance sheet, sometims certain ratios (like debt/liability for bank covernant) include these liability and if the business failed to meet these rations, you can get an immediate recall of your funding arrangements, like debt or loans.

    • boredrandom on 10/12/2021 - 08:42

      This! Most people are talking about it from the liabilities side, but it's just as much about reducing expense for the period, improving the P&L.

  • Antikythera on 09/12/2021 - 18:30

    my boss is about to take two weeks leave.
    no one is going to be replacing her.
    the business is running as normal during the time she is away.
    her assistant managers will be performing any duties.
    or she will ensure key tasks are done before she goes.
    later in the year her assistants will do the same thing.

    the leave costs the organisation very little when used this way.

    banked up and either used in big blocks or taken as payment on severance it will require replacement staff.

  • Nitrollparty on 09/12/2021 - 20:29
    +1

    used to work for woolies, they didnt care at all how much leave we had or if we used it at all! when i left i had 6 months of leave up my sleeve…was a great pay day for sure… now i work for Bunnings, and they whinge if we have any more than 2 weeks and tell us to take it asap. Pretty damn annoying if you want save it for a OS trip any time soon

    • oO0Dam0Oo on 09/12/2021 - 22:42
      +1

      6 months leave they didn’t have to pay super on!

    • hasher22 on 09/12/2021 - 22:44
      +2

      Yup. U feel ya. Optus in my department couldn't give two hoots about annual leave. But I went to work for a bank and they were on me when I didn't take annual leave in my first year working.

      I ignored them. Quit with another job and manager at the time had a little hissy fit about me getting a payout. Bruh, it's not your company stop taking it to heart.

  • tomcat83 on 09/12/2021 - 20:45

    Tbh businesses, in my experience, mainly care about leave balances when in a down turn. As others have said if an employee is on leave they utilise their leave balance and it the companies labour expense gets some relief for a while.

  • john_conner on 09/12/2021 - 20:53

    Haha OP you made my day on how ignorant you are in accounting.

    Anyway NAB sometimes makes people cash out their excess leave when they got promotions so that their leave couldn’t be cashed out at a higher rate. They would literally stand over people while they requested it in the system. I guess that’s what you get for working at a bank.

  • hhong1 on 09/12/2021 - 21:20
    +1

    With all full-time employees accumulating 4 weeks of annual leave each year, wouldn't the obvious answer be:
    Scenario 1: If an employee works for 1 year and takes no leave, then they have earned 52 weeks of wages plus have 4 weeks of accumulated leave. If they then leave after that 1 year, they are also paid out their 4 weeks leave. Ie. the company has paid for 56 weeks of wages in total.

    Scenario 2: If the employee had used up all 4 weeks of leave during that year, they would've worked 48 weeks and taken 4 weeks leave. If they then leave after that 1 year (like in the scenario 1), in this case they would have no leave balance remaining. Ie. the company paid for 52 weeks of wages in total.

    Now imagine the same 2 scenarios but with an additional year added and a pay rise after the first year.
    Scenario 1, the company would now have paid 52 weeks at old rate (year 1), 52 weeks at new rate (year 2) and a further pay out of 8 weeks of unused leave (all at new rate despite 4 of those being earned at the old rate). Ie. 52 x old rate + 60 x new rate
    Scenario 2, the company would have paid 52 weeks at old rate (48 weeks work + 4 weeks leave taken) and 52 weeks at new rate (again 48 weeks of work + 4 weeks leave taken) and no pay out when the employee leaves the company. Ie. 52 x old rate + 52 x new rate

    Obviously, in scenario 2, there is the potential for reduced revenues while the employee is on leave, but there is usually sufficient cover from other employees to mitigate/reduce the impact, so that it is more beneficial for the company to have the employee use up their leave. This, plus cashflows, budgeting, on-costs and all other points already raised by others etc, it's pretty clear why companies are so hot on reducing accrued leave balances.

  • sackrace on 09/12/2021 - 22:59

    It's the accrual, when you're on leave you're being paid with money they e already had to save against that liability.

    If you work 52 weeks in a year you effectively cost the company more because you earn 52 weeks wages and incur 4 weeks of leave accrual.

    In the states where they don't have that obligation there's less stress on this point, often people just lose their leave because it's not an entitlement.

  • redslert on 10/12/2021 - 01:04
    +1

    Leaving the financial aspects aside, if you have a small team of people saving large balance in annual leave you will eventually run into the situation where multiple people want to take extended periods of leave at the same or overlapping times. Staff taking leave at various times throughout the year or at least together during the quiet period e.g. Christmas & New Year is ideal.

    You might know accounting but you don't understand staff management.

  • tonka on 10/12/2021 - 01:29
    +3

    It's fairly straight forward.

    A company budgets to pay you 48 weeks wages and 4 weeks annual leave a year. If you don't take your annual leave their expense is 52 weeks wages plus 4 weeks annual leave.
    The annual leave is an expense when accrued regardless of when you take it as it belongs to you, not the company.
    So if you don't take your annual leave in year you push the wage expense up by around 7.5%.

    If you are someone who would need to be replaced with temporary labor, the above equation may be moot. But most people's absence is just absorbed or the workforce is structured with surplus labor to ensure coverage. Which makes it even more important to budget for people to take their leave.

    And yeah the people that prepare these budgets have taken courses in accounting.

  • tonka on 10/12/2021 - 01:39
    +1

    On reading the thread. The real question is why did you include question marks in you initial comment. It's become clear your intention is to state an opinion, not ask for information.

  • T1OOO on 10/12/2021 - 02:21

    Everyone has missed the real reason. Like has anyone ever been on the other side to actually answer this question properly or what ?

    Simple. Coz I don’t want some shmuck saving up 3 months and taking it intone gon leaving us in the lurch! Like seriously isn’t it that obvious. Money ect liability nice try but irrelevant.

    • tonka on 10/12/2021 - 11:07
      +1

      Actually I'm working a 60 hour week just managing this from the 'other side' at the moment for a large company. And from the accounting perspective the main driver is def budget.

      • T1OOO on 28/12/2021 - 18:30

        you have actually shot your self in the foot here before you started, if your working that over time its a serious issue,.. i used to be like you too, and was doing een 80hours and weekends, if you cant fend for your self and do 9-5 then that is a bigger issue than the one your trying to address,… and kinda makes what ever you have to say tainted,…. this was in the good old start up phase where i was the only one, now when you have more, ie in a large company, there is no excuse, your getting shafted, people have much more respect for those that work 9-5 and are good at their jobs then those doing copious amounts of over time just to "manage"

        merry xmas

        ps, the other only legitimate answer is that they want you to have a break and be fresh, and 2, to make sure that the business can function with you actually not there, ie no hidden things so if you really were gone things dont stop and stand still.

        • tonka on 28/12/2021 - 20:19

          What does the hours I am working have to do with the accounting concept. And F.U. I am good at my job. You shoot yourself in the foot and the head with your multitude of assumptions. No you were never like me, I never would accuse a stranger of not being able to 'fend for themselves' on such a pittance of information.

          • T1OOO on 29/12/2021 - 04:43

            @tonka: Ur still on the first page of the second chapter. Don’t shoot the messenger quite angry I think it’s not at me but at urself.

            Enjoi

            Ps ur wrong on all accounts and u knows it.

            • tonka on 29/12/2021 - 06:30

              @T1OOO: You obviously have no idea, evidenced by your original statement. 'Like has anyone ever been on the other side to actually answer this question properly or what ?' So when you are easily shown to be wrong, you move straight to attacks and now gaslighting?
              There are many whose jobs entail managing employee entitlements, you are not one of them. How about you tell us what your field is that makes you an expert.

              • T1OOO on 05/01/2022 - 11:11

                @tonka: i'm not the one insulting and abusing people, just think about it, to run a business you cant have your company taking 3 months leave, . its more than the financial liability, the practicality is that the business needs to continue to operate, most institution have leading facilities available to cover any minor fluctuations or entitlements, compared to the real problem of a company not having enough staff at the same time to actually operate due to saving up leave and everyone taking it off at the same time. I have to explain this to clueless employees wanting to take 3 months off now to go back to their home country, that's, great but we have a business to run. No you ant back fill and get some one up to speed to the same level to replace them, its the real world, people have lost themselves in the forest from the trees.

                • tonka on 05/01/2022 - 14:47

                  @T1OOO: Why are you even talking to me when you think I can't fend for myself, am no good at my job, my opinion is tainted and I let myself get shafted. All pretty judgemental with with very little information. If you knew anything about managing leave accruals you would automatically have understood the workload is seasonal, and my comment was made in the prelude to Christmas. As I said you have no idea, and you didn't answer the question about what makes you an expert. I have 35 years experience specifically in the field of managing employee entitlements. Go back and chat with your 'clueless' employees that I am sure think you are 'wonderful' with that attitude to them.

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