Appendix 3: Severance payment disclosure requirements under the Local Government Act 2002 and accounting standards

Local government: Results of the 2016/17 audits.

A local authority must disclose in its annual report the amount of a severance payment to an employee in return for the employee's agreement to end their employment. The local authority must disclose the number of severance payments and the amount of each payment, but does not need to identify the employees who received them.49 Where the payment is made to the chief executive, it must be disclosed separately.

The Local Government Act 2002 defines a "severance payment" as—

any consideration that a local authority has agreed to provide to an employee in respect of that employee's agreement to the termination of his or her employment, being consideration, whether of a monetary nature of otherwise, additional to any entitlement of that employee to
(a) any final payment of salary; or
(b) any holiday pay; or
(c) any superannuation contributions

The disclosure requirement is intended to provide transparency about the costs to local authorities of severance payments made to staff. The disclosure requirement applies to payments made under a negotiated agreement with the employee to end their employment that are additional to any existing legal entitlement to payments of final salary, holiday pay, or superannuation contributions. Those legal entitlement payments are not additional costs arising from the negotiated agreement, but must be made regardless of how the employment ends. In contrast, the additional payments are usually set out in a settlement agreement negotiated by the local authority with the departing employee.

Remuneration disclosures for local authority employees

Local authorities are also required to disclose information about remuneration to councillors and staff in their annual reports.

For employees, local authorities are required to disclose in their annual reports:50

  • the chief executive's remuneration paid or payable during the period covered by the annual report;
  • information about the number of employees as at the last day of the financial year and their "total annual remuneration",51 including the number receiving remuneration of:
    • less than $60,000; and
    • more than $60,000, in bands of $20,000; and
  • the same information for the previous financial year for comparison.

Accounting standards for related party disclosures

Accounting standards require similar but slightly different information to be disclosed and only for senior employees.

Accounting standards require local authorities to disclose information about remuneration and benefits paid to related parties.52 Related parties include members of the governing body and senior management (referred to in the standards as "key management personnel"), as well as their close family members. The disclosures are made in notes to the financial statements.

The requirement to disclose remuneration and benefits includes "termination benefits". These are payments to employees at the end of their employment, arising from the entity's decision to terminate employment before the retirement date or an employee's decision to accept voluntary redundancy.53 This is broader than the definition of "severance payment" in the Act.

The aggregate amount of remuneration and other benefits paid to each category of key management personnel must be disclosed. The standard does not require public benefit entities to disclose termination benefits separately.

For-profit entities must disclose termination benefits separately

Entities that operate for profit are required to make slightly different disclosures.

The accounting standards applying to "for-profit" entities requires entities that are publicly accountable or large54 to disclose termination benefits separately from remuneration and other benefits paid to key management personnel.55 This requirement is more transparent than the requirement for public benefit entities.

In practice, some public benefit entities also disclose termination benefits received by key management personnel employees separately from other remuneration.

49: Local Government Act 2002, Schedule 10, clause 33.

50: Local Government Act 2002, Schedule 10, clauses 32 and 32A.

51: Total annual remuneration includes the value of any non-financial benefit that was paid or payable during the financial year – Local Government Act 2002, Schedule 10, clause 32A(4).

52: The standard applying to local authorities is Public Benefit Entity International Public Sector Accounting Standard 20 Related Party Disclosures (PBE IPSAS 20), issued by the New Zealand Accounting Standards Board of the External Reporting Board,

53: The accounting standard that sets out how entities should account for termination payments and other employee benefits is Public Benefit Entity International Public Sector Accounting Standard 25 Employee Benefits (PBE IPSAS 25), issued by the New Zealand Accounting Standards Board of the External Reporting Board,

54: Known as Tier 1 entities in the External Reporting Board's New Zealand Accounting Standards Framework 2012, which defines both "publicly accountable" and "large".

55: The related party disclosure standard for profit entities is New Zealand Equivalent to International Accounting Standard 24 Related Party Disclosures (NZ IAS 24).