Note 13. Employee entitlements

Current entitlements

Employee entitlements, which IR expects to be settled within 12 months of balance date, are measured at nominal value based on accrued entitlements at current rates of pay. These include salaries and wages accrued up to balance date, annual leave and time off in lieu earned up to but not yet taken at balance date, and retiring and long-service leave entitlements expected to be settled within 12 months.

IR recognises a liability for sick leave to the extent that absences in the coming year are expected to be greater than the sick leave entitlements earned in the coming year. The amount is calculated based on the unused sick leave entitlement that can be carried forward at balance date, to the extent that IR anticipates it will be used by staff to cover those future absences.

Non-current entitlements

Employee entitlements that are payable beyond 12 months, such as long-service leave and retiring leave, have been calculated on an actuarial basis.

Explanation of major variances against budget

Provisions for total employee entitlements were $11.857 million higher than budget. This is mainly due to a higher amount of annual leave accrued.

Termination benefits

Termination benefits are payable when an employee’s employment contract is terminated before their normal retirement or when an employee accepts voluntary redundancy in exchange for these benefits. IR recognises the expense when it is demonstrably committed to either terminate the employment of current employees, according to a detailed formal plan without the possibility of withdrawal, or as a result of an accepted offer for voluntary redundancy.

Termination benefits to be settled within 12 months are reported at the amount expected to be paid. Otherwise, they are reported as the present value of the estimated future cash outflows, where applicable.

There were no movements in provisions for termination benefits from 2023–24 to 2024–25. Movements in the provisions for termination benefits and other provisions from last financial year 2023–24 are as follows: 

Measuring retiring and long-service leave liabilities

The actuarial calculations for long-service leave and retiring leave liabilities are based on:

• employee contractual entitlements
• years of service accrued to balance date and years remaining to entitlement
• the present value of the estimated future cash outflows using an applicable discount rate and salary inflation rate.

Sick leave, annual leave and vested long-service leave are classified as a current liability. Non-vested long-service leave and retiring leave liabilities expected to be settled within 12 months of balance date are also classified as a current liability. All other long-service leave and retiring leave is classified as a non-current liability.

The present value of retiring and long-service leave obligations depends on a number of factors that are determined on an actuarial basis by an independent actuary. Key assumptions used in calculating liabilities are the discount rate and salary inflation. Any changes in these assumptions will impact the carrying amount of the liabilities. The methodology used is consistent with PBE IPSAS 39 Employee Benefits and the liability has been valued using the projected unit credit method.

The discount rates used by the independent actuary for the retiring and long-service leave valuations are based on the Treasury's published forward rates at 30 June 2025. The forward rates are derived from New Zealand government bonds. The long-term salary inflation assumption is based on the Treasury's published rates at 30 June 2025 and agreed employee collective agreements outcomes. The long-term salary inflation assumption used was 2.8% (2024: 3%).

The net effect of assumptions for discount rates and salary inflation has resulted in an increase to the liability. The following section provides a sensitivity analysis of these assumptions.

Sensitivity analysis

The following table shows the effect of changes in forecast discount, salary inflation and withdrawal rates on liabilities for long-service and retiring leave. Each factor is considered separately as if all other factors remained constant.