By Abby Wells
Updated August 2018
If you’re running a business, accounting guidelines mean that you may need to account for holiday pay accruals for employees at the financial year end. Here’s our guide on the process:
What you need to know about holiday pay entitlement
The latest set of accounting guidelines, FRS 102 made some extra demands on
finance departments when they were introduced in 2015. These included the requirement for firms to consider the amount of outstanding holiday held by employees at the year-end as a potential accrual.
As of 1st January 2017, the Financial Reporting Standard for Smaller Entities (FRSSE) ceased to exist – which means many smaller companies now need to adopt FRS 102. As a result paragraph 28.5 of FRS 102 may apply to you.
‘When an employee has rendered service to an entity during the reporting period, the entity shall measure the amounts at the undiscounted amount of short-term employee benefits expected to be paid in exchange for that service.’
When do I need to account for holiday pay accruals?
How to calculating holiday pay accrual
Let’s take XYZ Ltd., for example.
XYZ Ltd. employs six staff with an annual salary cost of £180,000. This includes two members of staff on £50,000 and four on £20,000. The annual income of the firm is £240,000.
XYZ Ltd. offers 28 days paid leave each year on a holiday calendar that runs until 31st March. XYZ’s employees will have accumulated nine months – or 75% – of holiday entitlement by the company year-end on 31st December, which amounts to 21 days.
At the year-end, the staff have taken 7, 11, 6, 15, 19 and 10 days leave respectively. To calculate the accrual, XYZ Ltd. would need to work out the hours at daily equivalent of the two staff on £50,000 in addition to the hours at daily equivalent of the four staff on £20,000.
Assuming 260 working days over the course of the year, the higher earning staff would earn £192.31 per day and the lower earning staff would earn £76.92 per day, so the calculation would look like this:
£192.31 x ((21 – 7) + (21 – 11)) = £4,615.44
£76.92 x ((21 – 6) + (21 – 15) + (21 – 19) + (21 – 10)) = £2,615.28
£4,615.44 + £2,615.28 = £7,230.72
This works out at roughly 3% of XYZ Ltd.’s total income which could be considered material. Your auditor will be able to confirm whether or not you’ll have to make an adjustment.
How can I avoid having to make an adjustment?
As a means of reducing the potential difference at the end of the year, many firms send out reminders to staff about their annual leave entitlement and how many days they have left to take. Others cap the amount of leave that can be carried over from one year to another to five days. Synchronising your holiday calendar with your financial year calendar also helps to reduce the likelihood of a material difference.
For more information on staying compliant with FRS 102, or advice on payroll services for small business get in touch with the Hillier Hopkins team. We would be happy to help.
This article is written for general interest only and is not a substitute for consulting the relevant legislation or taking professional advice. The authors and the firm cannot accept any responsibility for loss arising from any person acting or refraining from acting on the basis of the material included herein.