Accruing leave pay and bonuses at year end
How IAS 19 treats unused leave and bonuses earned by year end as short-term benefits, how to measure the accrual, and how to post and present it.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Staff work through December, or June, or whatever the client's year end is, and some of what they have earned is not paid until later. The leave days built up but not yet taken. The thirteenth cheque or performance bonus paid in the first month of the new year for work done in the old one. The commission on sales closed before year end but paid with next month's salary run.
Payroll pays these when they fall due. The statements have to recognise them when they are earned. For a labour-intensive client, such as a security company, a call centre or a hotel, the difference can be one of the largest year-end adjustments in the file. This article covers what IAS 19 says, how to measure leave and bonus accruals, and how to post and present them.
Short-term benefits under IAS 19: undiscounted, as service is rendered
IAS 19 prescribes the accounting for all types of employee benefits except share-based payment, which falls under IFRS 2. The standard describes employee benefits as all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment. Leave pay and bonuses are squarely within it.
Under IAS 19, short-term employee benefits, meaning those to be settled within 12 months, other than termination benefits, are recognised when the employee has rendered the service. They are measured at the undiscounted amount of benefits expected to be paid in exchange for that service.
Three phrases carry the weight:
- When the employee has rendered the service. The trigger is the work done, not the payment date.
- Undiscounted. No present value calculation is needed for these short-term amounts.
- Expected to be paid. The measure is what the client actually expects to pay, which is where judgement enters.
Investopedia's general definition of accrued expenses fits: expenses recognised in the accounting period in which they are incurred, before they have been paid. Its examples include employee commissions, wages and bonuses earned but paid in the next period.
Leave days owed at year end
The leave accrual starts with a schedule of each employee's leave balance at year end. Most payroll systems can produce one; check it against a sample of leave forms, because leave taken but not captured is a common source of overstatement.
Then decide what the client expects to pay for those days. Two questions shape that:
- Does the leave carry over or lapse? Local employment law and the client's own leave policy decide whether unused leave can be carried into the next year, taken later or paid out on leaving. Leave that will lapse unused without payment is not a benefit the client expects to pay.
- At what rate? Value each day at the employee's current daily rate of pay, plus any employer costs that go with paid leave under the client's arrangements.
A worked example in words. A security company's guards each have a leave balance at year end. The company's policy, consistent with the applicable law, lets guards carry unused leave forward. The preparer takes the payroll's leave balance report, tests it against leave forms for a sample of guards, values each guard's days at their current daily rate, and adds the employer contributions that are payable on leave pay under the client's arrangements. The total is the leave pay accrual.
Bonuses: obligation or discretion
Bonuses need a different first question: has the client committed itself to pay?
- A bonus written into employment contracts, or a fixed annual payment such as a thirteenth cheque that staff earn by working through the year, is earned as the service is given. Accrue the portion earned by year end.
- A performance bonus based on a formula the company has communicated, where the year's results are known, should be accrued at the amount expected to be paid.
- A purely discretionary payment, decided after year end with no prior commitment, contract or established practice behind it, needs a closer reading of IAS 19 before anything is accrued.
Ask for the board minute or management decision setting the bonus pool, and check payments made after year end against the accrual. A bonus paid in the first month of the new year for the old year's performance is the clearest evidence there is.
Posting the accrual and reversing it next year
The accrual is posted at year end as an expense against staff costs and a liability for what is owed. In the following year, when the leave is taken or the bonus is paid, the payment settles the liability. Many bookkeepers handle this with a reversing journal at the start of the new year, so that the full payment can be posted to the expense as usual and the net effect is right.
In Achekam's Studio, staff post the year-end accrual as an adjusting entry against the client's trial balance. Keep two ideas separate. The planned reversal at the start of the next year is ordinary bookkeeping in the client's books. Correcting an adjusting entry that was simply wrong is different: in the Studio, a wrong adjusting entry is reversed with a record of who reversed it and why, never deleted, so the file shows the history. Keep the leave schedule and the bonus calculation in the working papers beside the entry.
Where the accrual appears in the notes
The liability usually sits within trade and other payables, or as its own line where it is large. The expense sits in staff costs. In the Studio, notes take their figures from the mapped trial balance, so map the leave pay and bonus accrual accounts to the right line before reviewing the payables and staff costs notes; a line carries a note reference only when that note is in the set. The Studio's standard policy wording is based on IFRS for SMEs and is labelled for review before issue, and staff can write a short employee benefits policy describing how leave and bonuses are accrued. Building the staff costs note from payroll records is covered in the staff costs note from payroll, and other year-end accruals in accrued expenses at year end.
The IFRS Foundation's IAS 19 page summarises how the standard accounts for all types of employee benefits except share-based payment. Ask the client for the year-end leave balance report and the bonus decision together, at the planning meeting, so both can be tested before the draft is built.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
