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Why outdated assumptions aren’t AASB 119 compliant and how it could cost your business
When it comes to preparing annual financial statements, recalculating employee benefits every year might feel like a pointless waste of time. We promise it’s not.
Many businesses assume their employee provisions don’t change much from year to year. When you’re pressed for time (and who isn’t these days), rolling forward last year’s calculation sheets feels like a logical shortcut. But you have to remember that we live in a rapidly changing economic environment. Wage inflation, rising superannuation rates, and evolving workforce trends mean that employee provisions calculated on outdated data may no longer reflect reality.
What seemed accurate 12 months ago may now be materially out of date.
While financial statements capture a snapshot of your financial position at a point in time, some balances require a forward-looking approach. In these cases, your inputs and assumptions cannot rely on historical data like last year’s figures.
AASB 119 Employee Benefits requires that employee provisions be valued at their expected future settlement amount.
That means your assumptions must be forward-looking and reflect:
- Salary growth rates;
- Superannuation rates;
- Workcover rate;
- Payroll tax rates (if applicable);
- Leave loading (if applicable);
- Discount rates in order to determine the present value of future obligations;
- Annual leave expected to be settled within twelve months versus settlement after twelve months
- Probability factors (for long service leave);
Put simply: provisions must reflect what you expect to pay, not what you paid last year.
The most common AASB 119 mistakes
We see certain issues crop up consistently, as many businesses continue to rely on outdated assumptions. Some of the most common errors we encounter include:
- Outdated superannuation rates - Leads to understated employer obligations as superannuation guarantee increases take effect.
- Ignoring wage inflation or planned enterprise agreement increases - This can have a significant effect in award‑driven sectors.
- Using last year’s or outdated WorkCover rates - Misstates leave‑related costs tied to employee earnings.
- Relying on outdated probability factors for long-service leave - This is risky in a labour market with increasing employee turnover.
- Using old discount rates - Inconsistent with current market conditions and can distort long‑term benefit obligations.
These mistakes directly affect financial accuracy and strategic clarity.
The cost of getting it wrong
Failing to update assumptions can have significant financial consequences. Employee provisions are more than numbers on a balance sheet. They represent very real obligations, where even small variances in key inputs can lead to misstatements. These discrepancies can affect liquidity, and may even breach lending covenants if provisions are materially misstated.
Potential consequences include:
- Audit adjustments and additional scrutiny.
- Incorrect budgeting for employee‑related cash outflows.
- Potential breaches of banking covenants if liabilities are materially understated.
- Internal rework and delays when financial statements need correction.
Best practice tips to ensure your AASB 119 assumptions reflect reality
To ensure accuracy:
- Review key assumptions annually or more frequently for volatile industries.
- Update for legislative changes (e.g., superannuation guarantee increases).
- Apply current wage inflation forecasts and enterprise agreement commitments.
- Benchmark discount rates against government bond yields or other relevant market indicators.
- Validate probability factors using recent HR data and workforce trends.
- Document assumptions clearly for audit transparency.
Take action now
If you haven’t reviewed your employee provisions recently, now is the time. Outdated inputs are financial risks you can and should avoid. A proactive review ensures your provisions reflect reality and support sound decision-making.
For support with reviewing your assumptions or improving the accuracy of your provision calculations, contact your local RSM auditor.
