Auditing leave pay, bonus and pension accruals
How to test short-term employee benefit accruals at year end: leave pay, bonuses, unpaid fund contributions and termination benefits under IAS 19.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Payroll costs are usually tested month by month through the year. The accruals at year end are a different animal: amounts staff have earned but not yet been paid, worked out by someone in finance from leave records, bonus schemes and fund schedules, often in a spreadsheet prepared the week the books close.
Leave pay in particular tends to be underestimated or forgotten in smaller companies. Bonuses are often agreed after year end and debated as to which year they belong to. Retirement fund contributions withheld in the last month may not have been paid over. This article covers how to audit those short-term employee benefit accruals for clients in South Africa, Nigeria and Kenya.
The principle: recognise as the service is given
IAS 19 Employee Benefits, as the IFRS Foundation summarises it, requires short-term employee benefits, meaning those to be settled within 12 months other than termination benefits, to be recognised when the employee has rendered the service, and measured at the undiscounted amount expected to be paid for that service.
Two consequences matter for the audit:
- Timing follows the work, not the payment. If staff earned it this year, the cost belongs in this year, even if it is paid next year.
- No discounting. Short-term amounts are measured at what will be paid, so the test is about the right count and the right rate, not about present values.
Investopedia's examples of accrued expenses include employee commissions, wages and bonuses earned but paid in the next period. Those are exactly the items to look for.
Leave pay and bonus accruals
Leave pay
Where staff carry unused leave that the employer will pay, either as time off or on leaving, the client accrues for it. The accrual depends on two inputs:
- The leave balance per employee at year end, in days.
- The daily rate at which it will be paid.
Test both. Agree a sample of balances to the leave records and to approved leave forms, and recompute the daily rate from the payroll. Check that leave taken in the last weeks of the year was captured before the balance was struck, and that staff who left during the year are not still on the list. Ask what the client's policy says about forfeiting leave not taken, and whether the policy is applied in practice.
Bonuses
For bonuses, the question is whether an obligation existed at year end. Read the scheme rules, board minutes and employment contracts. A bonus promised in a contract or announced to staff before year end is a different matter from one the board might decide to pay. Agree the amount to the calculation in the scheme rules and, after year end, to what was actually paid.
Defined contribution amounts owed
IAS 19 defines a defined contribution plan as a post-employment benefit plan under which the entity pays fixed contributions into a separate fund and has no legal or constructive obligation to pay more if the fund cannot pay all employee benefits. Under IAS 19, when an employee has rendered service, the contribution payable for that service is recognised as a liability, an accrued expense, and as an expense.
Whatever the fund, decide first whether it meets that definition; the classification decides the accounting. For a defined contribution fund, the year-end test is straightforward:
- agree the contributions due for the last month, both the employer's share and the amounts withheld from staff, to the payroll;
- agree payment after year end to the bank statement and the fund's acknowledgement;
- look for arrears: contributions withheld but not paid over are a liability and may be a regulatory issue for the client.
When termination benefits are recognised
Under IAS 19, a liability and expense for termination benefits are recognised at the earlier of when the entity can no longer withdraw the offer of those benefits and when it recognises costs for a restructuring within the scope of IAS 37 that involves termination payments.
If the client announced redundancies or signed settlement agreements around year end, check the dates. A plan discussed by the board but not communicated to staff, and still withdrawable, does not yet give rise to a liability under that test. Settlement agreements signed before year end almost certainly do.
Leave balances from the client's payroll and lead schedules in Achekam
Where the client runs payroll on Achekam, the client's own payroll keeps annual, sick, family responsibility and unpaid leave with a monthly accrual. A line manager approves their own team's leave and nobody approves their own, which gives the auditor an approval trail to test. Unpaid leave does not reduce pay automatically: payroll is warned and decides, so check how the client handled any unpaid leave near year end.
On the firm's side, the engagement's lead schedules are built from the trial balance and each figure traces to its lines, so the leave pay, bonus and contribution accruals can be followed back to the ledger. A working paper can carry a spreadsheet workbook whose figures refresh from the trial balance, with any figure it could not read listed, which suits a recalculation of the leave pay accrual. Where the recalculation differs, staff record an audit adjustment on the line with a reason. Our article on the staff costs note from payroll covers the disclosure side.
Recalculation tests
A practical programme for the accruals:
- Leave pay: recompute days multiplied by daily rate for a sample of employees; analytically, compare total days outstanding with last year and with headcount.
- Bonuses: recompute from scheme rules and audited results; agree to post year-end payment.
- Contributions: agree the last month's schedule to payroll and payment after year end.
- Termination: agree to signed agreements or announcements, and check the dates against the IAS 19 test.
- Completeness: review payments to staff in the first weeks of the new year for amounts earned before year end that were not accrued.
For the wider payroll audit, see auditing payroll costs.
The IFRS Foundation's summary of IAS 19 Employee Benefits sets out the recognition rules for short-term, post-employment and termination benefits and is the reference to check against the client's policy.
At your next year end, ask the client for its leave balance report and bonus scheme rules with the trial balance, not after it. The leave pay accrual is far easier to audit when the report it came from is in hand.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
