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Hospital Circular 13/2008

Date Issued: 7 May 2008

Distribution: Public Hospitals, Denominational Hospitals, Ambulance Services, Health Purchasing Victoria, Infertility Treatment Authority, Victorian Institute of Forensic Mental Health and Dental Health Services Victoria

Subject: To update the accounting treatment for Long Service Leave and associated funding

This Circular is also available as a PDF file (69KB)

This circular applies to Public Hospitals, Denominational Hospitals, Ambulance Services, Health Purchasing Victoria, Infertility Treatment Authority, Victorian Institute of Forensic Mental Health and Dental Health Services Victoria.

This Circular replaces Circular 5/2008, which was issued on 23 January 2008. The amendment relates to the meaning of ‘1.8% of salaries and wages’. This amendment is found in section B under the heading ‘Salaries and Wages Defined’

This Circular consists of three parts:

• Submission Date: The calculation of LSL debtor as at 30 June.
• Accounting for LSL: provides accounting treatment for the funding of Long Service Leave.
• Claim for Additional Funding: details information in relation to the claim for funding in excess of 1.8% loading.

(A)    Submission Date

Agencies are encouraged to calculate their LSL at 31 May as an indication of the movement for the year, however this will not be required to be submitted to DHS.  The actual LSL return should be calculated at 30 June and submitted by the 7th working day of July.

Please ensure the submission date is strictly adhered to, failure to do so may result in a creditor balance not being raised for your agency in DHS books.

Department of Treasury & Finance will make available the LSL wage inflator and discount rate on the DTF Website:

Submission Process

• Obtain the wage inflator and discount rate as at 30 June from the DTF web site as above.
• Obtain LSL entitlements (from payroll provider) as at 30 June.
• Calculate LSL provision.
• Submit LSL return to DHS by 7th working day in July.

(B)    Accounting for LSL

In 2000/01 the Department of Human Services (DHS) assumed the liability arising from the net increase in the Long Service Leave (LSL) provision of public hospitals (including denominational hospitals) and ambulance services.  These agencies were required to record as revenue and DHS as a debtor, an amount equivalent to the net increase in the LSL liability, and where a net decrease occurred, the reverse was applicable, and the decrease was recorded as an expense to the extent of the revenue previously taken up, and where applicable, DHS as a creditor.  From 2007/08 onwards, the calculation of the debtor balance will still require any decrease to be taken against the cumulative debtor balance but only to the extent this is zero.  Any additional amount below zero will no longer be taken up as a liability to DHS.
 
At the introduction of casemix DHS included a loading of 1.8% of salaries for LSL cash settlement purposes and this loading has continued to be applied in funding for subsequent award increases. Analysis of data over the years indicates that generally agencies manage cash outgoings within the 1.8% payment. However, where agencies are paying out cash in excess of funding, DHS has agreed to provide additional funding to meet this excess. This arrangement commenced in 2000/01 based on year-end results (Part (C) contains details on how to claim additional funding).

Salaries and Wages Defined

The LSL debtor to be raised is the difference between the AASB 119 calculated increase in the LSL and the 1.8% of salaries and wages for the same period. For the purpose of calculating the 1.8% of salary component in casemix, salaries and wages are defined as the remuneration for an employee’s normal hours of work for the period calculated at the employee’s ordinary time rate of pay as used in the AASB 119 calculation.

Calculation and Accounting for LSL Debtor Balance

The LSL debtor to be raised is the difference between the AASB 119 calculated increase in the LSL liability for the year and the 1.8% of salaries and wages, where salaries and wages, include both HSA and Non-HSA salaries and wages.  This includes all on-going performance payments, which an employee receives in the normal course of their duty, it also includes any recreation, sick and special leave.  Salaries and wages does not include any payment for long service leave, travelling allowance, on-costs such as Workcover, superannuation, or any payment of a temporary nature of a reimbursement of expenditure incurred.

When the difference between the AASB 119 increase and the 1.8% of salaries and wages results in a net decrease in the LSL debtor, this decrease can only run down the cumulative debtor balance to zero and nothing below zero is to be recognised, that is, no DHS creditor balance is recognised.  A net increase in a subsequent period will result in a LSL debtor being raised. 

 Note: The debtor established by the non-cash revenue recognition can be run down in future years when the LSL provision for the year is less than the 1.8% funding or by the claiming of cash revenue to match a cash expense greater than the amount recognised in Health Service Agreement cash budgets. 

The following are recommended accounting entries along with the relevant Hospital Common Chart of Accounts (HCCOA) and Annual Financial Report (AFR) account codes, for entities to which this circular applies.

On recognition of non-cash services delivered:

Increase in debtor - arises when the increase in LSL provision for the year is more than the 1.8% of salaries included in casemix funding.

OR

Decrease in debtor - arises when the increase in LSL provision for the year is less than the 1.8% of salaries included in casemix funding.

* Agencies should recognise the debtor as non-current unless it expects to put in a claim for additional funding, in which case the amount being claimed should be recognised as a current debtor (ie. account A15580).

Accounting for Cash Revenue Related to Excess Cash Outgoing

The account number and accounting entry to recognise payment of additional cash revenue claimed in (C):

Portability of Long Service Leave Relating to Transfer of Employee between Agencies to Which this Circular Applies

Where employees transfer between applicable agencies and transfer their entitlements, the agency from which the employee is transferring is not to pay the new agency the entitlement that would have been otherwise paid to the employee.

Any increase or decrease in LSL provisions due to transfer of staff will be reflected in the net movement of LSL provisions of each entity and therefore will give rise to a corresponding increase or decrease in DHS debtor balance which will enable a claim for cash settlement if and when required.

DHS Information Requirements

DHS requires details of the liability calculation to establish reciprocal expense and creditor entries in the DHS financial statements. Details in the attached prescribed format are required by COB 7th working day of June. Late and/or incomplete and/or incorrect returns will NOT be accepted.

Data provided to DHS must be provided in the following pro-forma format (using the excel template below) with all information to enable processing of the DHS debtor balance:

Note: The provision of this information is not synonymous to a claim for additional funding.  Where cash outgoings in relation to LSL exceed funding provided agencies should submit a separate written claim to Metropolitan Health & Aged Care Services (refer to (C) Claim for Additional Funding below).

The proposed data source for the movement calculation is the agency's payroll system data, to be made available to DHS on request.
The DHS contact for agencies to supply information by COB 7th working day of July is:

Manager, Financial Reporting
Level 6, 50 Lonsdale Street, Melbourne 3000
Phone: (03) 9096 8316  Fax: (03) 9096 9258
Email: reporting@dhs.vic.gov.au

(C) Claim for Additional Funding (Cash outgoings in excess of funding provided in relation to LSL payments) - Explanatory Notes

• At the introduction of casemix, DHS included a loading of 1.8% of salaries for LSL purposes and this loading has continued to be applied in the funding of subsequent award increases.
• Hospitals Circular Publication 3/2001 dated 7 March 2001 entitled 'Management of Long Service Leave' recognised that generally large agencies manage within the 1.8% loading provided, although occasionally some smaller rural agencies experience difficulties by having to pay out cash in excess of funding.
• In 2000/01 DHS undertook to provide additional funding to agencies post the end of the financial year to offset cash outgoings in excess of funding provided.
• At the end of each financial year agencies should assess from their financial records whether cash outgoings in relation to LSL are in excess of funding provided.
• Where cash outgoings in relation to LSL exceed funding provided, agencies should submit a written claim to:

Manager, Financial Analysis & Funding
Metropolitan Health & Aged Care Services
Level 17, 50 Lonsdale Street, Melbourne 3000

• The claim should take the form of a letter or e-mail from the agency's Chief Executive Officer or Chief Financial Officer outlining cash outgoings in relation to LSL as compared to the LSL funding provided.
• The claim should be computed as follows using audited financial data found in the agency’s Annual Report.

• Metropolitan Health & Aged Care Services Division (MHACS) will verify agency claims and liaise with agency personnel to clarify any discrepancies that might emerge during the verification process.
• Following approval of claims by DHS, payments will be made to agencies standard bank accounts used for HSA payments. Agencies will be advised as to the amount and dates of payments.
• Claims for each financial year should be submitted by 29 October of the following financial year. 
• In future financial years, agencies will be required to reduce the amount of their claims by the accrued surplus of funding where funding provided (i.e. 1.8% loading of salaries) exceeds LSL cash outgoings for LSL. To assist in this process, MHACS will accumulate data relating to agency cash outgoings in relation to LSL as compared to funding provided.
• Refer to (B) for the accounting treatment of the funding received relating to the excess cash outgoing in relation to LSL.
• If you require further information on the process of claiming cash on LSL settlements please contact Victor Liew, MHACS on (03) 9096 7450 or by email victor.liew@dhs.vic.gov.au.

Lance Wallace
Executive Director
Metro Health & Aged Care Services