Question

Asia Pacific Ltd started operating on 1 July 2017 with 12 employees. Three years later all of those employees were still with the company. On 1 July 2019 the company hired 15 more people but by 30 June 2020 only 10 of those employed at the beginning of that year were still employed by Asia Pacific Ltd. All employees are entitled to 13 weeks’ long-service leave after a conditional period of 10 years of employment with Asia Pacific Ltd. At 30 June 2020 Asia Pacific Ltd estimates the following:  The aggregate annual salaries of all employees hired on 1 July 2017 is now $1,200,000.  The aggregate annual salaries of all current employees hired on 1 July 2019 is now $800,000.  The probability that employees hired on 1 July 2017 will continue to be employed for the duration of the conditional period is 40 per cent.  The probability that employees hired on 1 July 2019 will continue to be employed for the duration of the conditional period is 20 per cent.  Salaries are expected to increase indefinitely at 1 per cent per annum. The interest rates on high-quality corporate bonds are as follows: Corporate bonds maturing in seven years 6% Corporate bonds maturing in eight years 8% Corporate bonds maturing in nine years 8% Corporate bonds maturing in ten years 10% At 30 June 2019 the provision for long-service leave was $12,000. Required: a) Calculate the total accumulated long-service leave benefit as at 30 June 2020. b) What amount should be reported for the long-service leave provision as at 30 June 2020 in accordance with AASB 119? c) Prepare the journal entry for the provision for long-service leave for 30 June 2020 in accordance with AASB 119. d) Which employee benefits are required to be discounted in accordance with AASB 119? (1 mark, maximum 100 words

Answer 1

Answer (a)

Calculation of the amount entitled for leave-benefit is as follows:

Years of Service Life	Current salary (A)	No. of employee (B)	Total salary (A) x (B)	Inflation rate	No. of years to maturity	Projected Salary	Entitlement
3	$ 1,200,000	12	$ 14,400,000	1%	7	$ 15,438,749	$ 1,157,906
1	$ 800,000	10	$ 8,000,000	1%	9	$ 8,749,482	$ 218,737

Working Notes:

1. Calculation of the projected salary:

    Projected Salary = Total Salary

                                (1+ Inflation rate)^{No. of years to maturity}

2. Calculation of the entitlement amount:                 

       Entitlement Amount = Projected Salary x 13 weeks x No. of years of service

                                                                         52 weeks   Years of conditional period

Answer (b)

Calculation of the amount of accumulated (total) long-service leave benefit as on June 30, 2020:

Years of Service Life	No. of years to maturity	Entitlement	Corporate bond rate	Present Value	Probability	Long service leave benefit
3	7	$ 1,157,906	0.06	$ 770,074	0.4	$ 308,029
1	9	$ 218,737	0.08	$ 109,423	0.2	$ 21,885
Total	$ 329,914

Working Note:

4. Calculation of the present value (PV) of the amount of entitlement:

            Present Value =     Amount of entitlement

                                             (1+ rate of corporate bond)^{years to maturity}

5. The rate of a corporate bond is decided by the number (no.) of years left until the date of maturity. Thus, the rate of corporate bond for the service life of 3 years (and maturity years remaining is 7) is 6%, and for the service life of 1 year is 8%.

Answer (c)

Journal entry for the provision for long-service leaves for 30 June 2020 in accordance
with AASB 119:

Date	Particulars	Debit ($)	Credit ($)
2020
June 30	Payroll Expenses A/C                                                    DR.	329,914
	To Provision for Long-term service leave A/C		329,914
	(Being provision for long-service leaves made)

Answer (d)

Annual leave benefits which are classified as other long- term employee benefits under the revised AASB 119 will need to be discounted allowing for expected salary levels in the future period when the leave is expected to be taken.