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Accounting Treatment for Severance Pay Liability

Implementation: Effective for the 2005-06 financial statements of all departments, as defined in section 2 of the FAA.  Note: does not apply to revolving funds. 

Calculation: The 31 March 2006 liability is determined by multiplying a ratio of 21.79% to the department's annual gross payroll at year-end subject to severance pay, which is the payroll related to indeterminate employees.  Note: salary expense for indeterminate employees should not be used as a proxy for the eligible payroll at year-end since differences between these two amounts may exist (e.g. as a result of a reorganization during the year). 

The March 31, 2005 liability is determined by multiplying a ratio of 21.39% by your eligible payroll at March 31, 2005.  The 2005-06 annual expense for severance pay is determined by the difference between your opening and closing liability added to (or subtracted from) the actual severance expenditure for the year.

Comparatives:  The 31 March 2004 liability is calculated by multiplying the rate of 21.68% to the 2004 annual gross payroll at year-end.  The 2004-05 expense is the difference between the 31 March 2005 liability and 31 March 2004 liability.  This expense must be added or deducted (as appropriate) to the salary and employee benefits expense previously reported for 2004-05.   

Process:  The following accounting entries should be recorded in CFMRS:

April 1, 2005 opening balance entry (this is your March 31, 2005 liability):
  Amount FRA Auth Obj
DR Equity $XXX 36ddd 0000 0000
CR Allowance for Severance Benefits $XXX 21415 0000 0000

March 31, 2006 year-end entry (assuming an increase in the liability):
  Amount FRA Auth Obj

(1) 51844 Provision for severance benefits – Defence or 51846 Provision for severance benefits – all other departments;

(2) F124 – Allowances set up for severance pay

(3) 3469 – Charge to other liability account

(4) 6299- Net Increase or Decrease to Other Liability accounts

DR Provision for Severance Benefits $XXX 5184x(1) F124(2) 3469(3)
CR Allowance for Severance Benefits $XXX 22721 F124 6299(4)


  1. Because of the late date of this notice, departments have the option to not record the above entries in CFMRS.  In this situation, departments would still reflect the effect of the above entries in their financial statements but would only record the March 31, 2006 liability as the opening balance adjusting entry in fiscal year 2006-07. 
  2. Departments are reminded that the coding for actual severance benefits payable remains unchanged.  The accounting entries are described in the FIS Accounting Manual.
  3. The devolution entry must be entered in the same month as the entry performed by the Receiver General to reverse the central allowance.  As a result, please advise Paul Poulin at PWGSC, 956-1854 or paul.a.poulin@pwgsc.gc.ca, in the month that you intend to record the opening balance entry so that he can reverse the central allowance in the same month.

Financial Statement Presentation:

  • Statement of Financial Position: A line entitled "Employee severance benefits" should appear under long-term liabilities.  Any severance benefits payable at year-end would appear separately under current liabilities (e.g. accounts payable).   
  • Statement of Cash Flow: The change in the employee severance benefits liability would be presented under the Operating Activities category. 
  • Statement of Operations: The change in the liability between years should be added to or subtracted from the actual severance expenditure in the year.  This amount is reported in the Statement of Operations as the expense for the year under salaries and employee benefits.
  • Notes:  Reference to the severance benefit liability appears in the note on significant accounting policies and a separate note on employee benefits.
    • Significant Accounting Policies

      Severance benefits: Employees are entitled to severance benefits under labour contracts or conditions of employment.  These benefits are accrued as employees render the services necessary to earn them.  The obligation relating to the benefits earned by employees is calculated using information derived from the results of the actuarially determined liability for employee severance benefits for the Government as a whole. 

    • Employee Benefits: Severance benefits: The department provides severance benefits to its employees based on eligibility, years of service and final salary.  These severance benefits are not pre-funded.  Benefits will be paid from future appropriations.  Information about the severance benefits, measured as at March 31, is as follows:
  2006 2005
  (in thousands of dollars)
Accrued benefit obligation, beginning of year 61,454 59,318
Cost for the year 2,510 2,306
Benefits paid during the year (168) (170)
Accrued benefit obligation, end of year 63,796 61,454
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