We are seeing more and more client organisations choosing to provide generous paid parental leave (PPL) entitlements, on top of the statutory payment. This has driven several questions in relation to the costing and accounting treatment of paid parental leave provisions. Here are some of our thoughts…

• Even if an org has introduced a formal paid parental leave policy, from a technical (Australian Accounting Standards) perspective, it can be difficult to justify the recognition of a provision at year-end. To create a provision, the following criteria need to be satisfied:
  • there is a past event creating a present obligation;
  • that the outcome is probable; and
  • it can be reliably measured.
     
• Each organisation’s context will differ (for example whether an employee has already notified the organisation of their intent to take the leave), and we see a range of differing approaches from auditors on the matter.
   
• It is a good idea to discuss your org’s circumstances and policy with your auditor, to understand their stance on a provision, should you wish to create and maintain one.

Financial modelling of proposed PPL policies

Purpose is sometimes asked to help with the financial modelling of proposed PPL policies. Clients are keen to understand how their organisation will fund the policy and how much it needs to put aside for this – whether as a provision, or simply within its annual budget.

Purpose typically uses the calculations and approach below:

1. The organisation needs to estimate the potential uptake of the leave amongst its staff, based on historical or other factors.
 
2. Since we may not know who will take the leave, the average cost of the leave needs to be calculated using an average weekly rate across the staffing cohort, multiplied by the weeks provided per the organisation’s policy, plus the organisation’s rate of staff oncosts (super etc – depending on the policy).
 
3. The average cost per uptake, multiplied by the expected uptake per year, will give a reasonable amount to provide for – either via a provision or within the organisation’s budget. This calculation and the assumptions need to be refreshed annually, to ensure that the provision or budgeted amount remains relevant.