TO ACCRUE OR NOT TO ACCRUE!
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Why do we need to know about our clients’ vacation and sick pay policies?
Employers are generally required to accrue a liability for employees’ rights to receive compensation for future absences. An exception to that rule applies to sick pay benefits, which need not be accrued until employees are absent. In order to determine whether a liability is correctly accrued we need to understand our clients’ compensated absences policies so we can make any necessary adjustments and make the appropriate disclosure in the financial statement.
If your employees are paid for absences due to vacations, illnesses, and holidays, a liability for future compensated absences should be accrued if all of the following conditions are met:
Œ The employee’s right to be paid for future absences is attributable to services he or she has already performed. Consideration to individual facts and circumstances should be made when determining whether a right relates to services already performed. For example, compensation for an absence granted to allow an employee to perform public services that will benefit the employer does not relate to services already performed. However, a leave granted to allow an employee time off to attend to a personal matter, while not requiring that the employee return to work, generally would relate to services already performed.
¨ The employee’s right to be paid for future absences vests or accumulates. Future absences are vested if they are not contingent on the employee’s performance of future services. Even if the employee leaves, the employer has an obligation to pay vested rights. Rights accumulate if they may be carried forward to succeeding years, thereby increasing the benefits that would otherwise be available in those years. Accumulating rights may be vesting or nonvesting.
Ž It is probable that the compensation will be paid.
¸ The amount that will be paid is reasonably estimable.
Nonvested accumulated sick pay benefits are excluded from the general accrual requirements because it is unfeasible to estimate when an employee will be sick and the amounts paid are seldom material. Those benefits need not be accrued even if they meet all of the criteria cited above. However, the employer’s actual practices should be considered when determining whether benefits are sick pay benefits. For example, unused accumulated “sick pay” benefits that are paid to employees who are not ill are not sick pay benefits and should be accrued.
In summary, an employer should have their compensated absences policy documented in the company’s employee manual. Upon our review of this policy, we can typically determine whether a liability for compensated absences is correctly accrued or not. If the accrual is necessary and hasn’t been made, we can determine if the potential accrual can be reasonably estimated and assist you with the calculation.
Jennifer
Raybon, CPA
Assurance
Services Department