An accurate closing requires more than simple pro-rating

For companies whose financial year does not coincide with the calendar year, or when preparing interim financial statements, calculating provisions for holiday pay and the thirteenth-month bonus is often an underestimated area of attention. At 31 December, companies can generally rely on calculations provided by their social secretariat. An interim closing, however, requires a more nuanced approach. Simply pro-rating the annual provision does not always provide an accurate picture of employee-related liabilities.

Why is a non-calendar financial year more complex?

At an interim closing date, companies are often in a transitional phase. Some obligations relating to the previous year may not yet have been fully settled, while new entitlements are already being accrued. As a result, existing provisions may need to be reversed while new provisions are recognised at the same time.

The correct calculation also depends on the employee category. Different rules apply to blue-collar and white-collar employees when it comes to the accrual and payment of holiday pay.

White-collar employees: three movements at the same time

For white-collar employees, holiday pay consists of two components: double holiday pay, which is generally paid in May or June, and single holiday pay, under which employees continue to receive their normal salary while on holiday.

At an interim closing date, the following elements must be taken into account:

• outstanding holiday pay relating to the previous year
• the reversal of holiday pay that has already been paid or taken
• the accrual of new holiday entitlements during the current year.

In practice, approximately 18.2% of gross salaries, excluding holiday pay and the thirteenth-month bonus, is often used to calculate the accrual of new holiday pay. The provision does not necessarily evolve on a linear basis. At certain times of the year, the liability may even be higher than at 31 December, as part of the previous year’s provision may still be outstanding while new entitlements are already being accrued.

Blue-collar workers require a different approach

The rules for blue-collar workers are different. Their holiday pay is paid through a holiday fund rather than directly by the employer. In addition, unlike white-collar employees, blue-collar workers do not receive their regular salary from their employer while they are on holiday. As a result, both the timing and the calculation of the provision differ.

It is therefore important to treat blue-collar and white-collar employees separately. Applying a single percentage to the entire payroll can lead to an incorrect valuation, particularly where the workforce includes both categories.

Don’t overlook the thirteenth-month bonus

The provision for the thirteenth-month bonus also deserves attention. Employees accrue entitlements month by month, which must be reflected in the financial reporting at the closing date.

Many companies calculate this provision based on gross salary plus employer social security contributions, pro-rated according to the number of months elapsed. Once the thirteenth-month bonus has been paid, the provision is reversed. However, the exact calculation method may vary depending on the applicable joint committee, collective bargaining agreements or company-specific arrangements.

Common pitfalls

When calculating provisions for holiday pay and the year-end bonus, the methodology is not always sufficiently aligned with the company’s actual situation. Key points to consider include:

• Actual holiday taken: A linear reversal of single holiday pay is a simplified approach. Where reliable information on the number of holiday days actually taken is available, a calculation based on actual holiday taken is preferable.
• Collective holidays: In sectors where holidays are concentrated during specific periods, spreading the provision evenly across the months can result in a distorted picture.
• Carried-over holiday days and overtime: Where these obligations are material, it should be assessed whether an additional provision or liability needs to be recognised.
• Employee turnover: New hires, departures and changes in working arrangements can have a direct impact on the calculation.
• Reconciliation with the social secretariat: Bear in mind that certificates and calculations provided by social secretariats are generally prepared on the basis of a 31 December closing date. Where the balance sheet date does not coincide with 31 December, these documents will often not provide an accurate representation of the provisions for holiday pay and year-end bonuses, making an additional recalculation necessary.

Conclusion

For companies with a non-calendar financial year, simply pro-rating the provisions for holiday pay and the thirteenth-month bonus is not sufficient. An accurate calculation requires an understanding of the timing of payments, the accrual of new entitlements and the differences between blue-collar and white-collar employees.

A well-considered approach results in more reliable financial reporting and helps avoid unexpected issues during an audit or year-end closing. Companies with a non-calendar financial year should therefore review these calculations carefully and in good time.

Does your company have a non-calendar financial year and would you like to verify whether your provisions for employee-related costs are calculated correctly? Grant Thornton’s specialists are happy to assist you.