Under FRS 102, there is a requirement to recognise a holiday pay accrual for any employees who have a remaining leave balance at the year end. The accrual is essentially treated as any other accrual but the way in which it is calculated and the circumstances in which it must be recognised can differ from employer to employer.
When Must a Holiday Pay Accrual be Made?
The need for the accrual stems from FRS 102 section 28.1 (A). This section covers “short-term employee benefits” and defines these as “expected to be settled wholly within twelve months of the end of the reporting period in which the employees render the related service”. (for further definitions please see the latest version of FRS 102).
Upon interpretation of this, there are 2 key situations where a holiday pay accrual must be recognised:
- Where the company’s holiday year does not match up to the financial reporting year end. This gives rise to the possibility that at the financial year end, employees may not have used up their pro-rated holiday entitlement and this will be due to them within 12 months after the financial year end.
- The financial and holiday years do line-up and there is an agreement with the employees that their unused holiday entitlement can be carried forward or paid to them.
Essentially, if there are any days of un-taken leave at the balance sheet date and these are going to be paid within 12 months of this date, an accrual needs to be put in place.
How to Calculate the Holiday Pay Accrual
The holiday pay accrual should be calculated based on each employee’s gross salary. You will also have to take into account the following items in the calculation:
- Number of days in the employee’s standard work week
- Employer’s national insurance and pension contributions.
- Number of days included in holiday entitlement.
For example, if we take the example of an employee who has 5 days leave unused at the financial year end that they were entitled to in the year. The employee works 5 days a week and has a gross salary of £26,000. In this situation, we will imagine that the financial and holiday year align and therefore, the 5 days is the definite accrual amount.
The steps to calculate the accrual are as follows:
- Work out the “daily pay rate”. To do this, multiply the number of working days in a week by 52: 5 X 52 = 260. We then divide £26,000 by this amount to get the daily gross pay amount. 26,000/260 = £100
- We then multiply the days accrued by the daily pay rate. 5 days X £100 = £500 gross pay accrual.
- Then we must factor in Employers NI as this will be paid upon paying the accrued holidays. You can do a more in-depth estimate of this amount but we are going to take a straight 13.8% as a general best estimate. £500 * 1.138 = £69.00
- Then we must factor in any employers pensions contributions as these will also be made upon the payment of the holidays. We will imagine these to be 5%. £500 * 0.05 = £25.
- Now we must add these numbers together to get the total accrual amount. 500 + 69 + 25 = £594
Based on these calculations, the total holiday pay accrual should be £594. This is a fairly straightforward example given that the financial and holiday year ends line up. We will look at an example of where these don’t line up further on in this post.
What are the Journal Entries?
The journal entries for a holiday pay accrual follow the same principles as any other accrual double entry. This involves recognising and accrual on the balance sheet, and an expense on the income statement.
The initial double entry to recognise the accrual should be as follows:
- Debit Wage Expenses £594
- Credit Holiday Pay Accrual £594
This journal entry recognises the fact that there is a liability on the balance sheet and also that in theory, an expense has been incurred.
Then, the subsequent accounting period, when the amounts are actually paid the following journal entry should be posted to release the accrual.
- Debit Holiday Pay Accrual £594
- Credit Bank £594
This entry should only affect the balance sheet as the expense has already hit the P&L in the previous accounting period. This entry reduces the bank balance for the amount paid out and also releases the accrual as there is no longer a liability to the employee.
What if the Holiday and Financial Years do Not Line Up?
If a company’s holiday year does not align with the financial year end, this can add a complication to the holiday pay accrual calculations.
In this situation the amount of holiday accrued will not be as clear-cut. Instead we must look at the employee’s full holiday entitlement and pro-rate the accrued amount.
For example, imagine a company with a year end of 31st December. The holiday year runs to 30th June. If we take an employee with an annual leave entitlement of 28 days and we know they have only taken 8 days of leave as of the 31st December, we can calculate the accrued days at year end.
To do this we must complete the following steps:
- Set an expectation for number of days taken as at the financial year end. Given that there is a 6 month overlap of the 2 periods, we would assume that the employee has taken 6/12ths, or one half, of their leave entitlement as at 31st December.
- Then we use this expectation to pro-rate the entitlement. Simply, multiply the 28 days entitlement by 0.5 to find one half it and this returns 14 days (28 X 0.5 = 14).
- Subtract the days actually taken from the expected days taken. 14 – 8 = 6.
- We now know the amount of days accrued – 6. These are days that the employee, in theory, should have taken in the financial year but hasn’t.
Now that we know the amount of days accrued, we simply carry out the same calculations as we did in the previous example, using 6 days as our basis.
Summary
We have now looked at a couple of examples and calculated the holiday pay accrual for each, inline with FRS 102 guidance. Keep in mind that if the employees cannot carry forward their holiday entitlement at the end of the financial year then these calculations are usually not necessary.
Please remember, these calculations are inline with our interpretation of the guidance laid out in FRS 102. When doing these calculations, please view the latest version of the guidance and ensure you agree with the methods carried out.
