When is an accrual needed if you track accrued paid time off?

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Many companies provide paid time off to employees, however not all employees use the entirety of their time off within the company’s fiscal year and roll over time to be taken in the following year. When this happens, it is the responsibility of the employer to track accrued paid time off for each employee. Accounting standards require an accrual when the following criteria are met:

  • The employer’s obligation to provide compensation for future absences results from the employees’ past services.
  • The employee’s rights to the paid absences either vest or accumulate.
  • The employer’s payment of the compensation is probable.
  • The employer can reasonably estimate the amount of its obligation.

Note that when the absence is vested, the employer has an obligation to pay the employee this benefit regardless of if the employee is terminated. Accumulated absences may be carried forward to future periods.

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Consider what your company’s policy is on vacation time – whether there is a maximum amount of vacation each employee is permitted to accrue or if a “use it or lose it” policy exists based on a certain timeline, such as year-end. Should such a policy exist, a year-end accrual may not be necessary as the paid time off would not roll into the next year. Another instance where an accrual may not be necessary is if your company has an unlimited/responsible paid time off policy. In this case, the company likely does not have an obligation for future paid time off allocations. As such, PTO is expensed as taken and no accrual is necessary. Additionally, consider whether employees earn paid time off based on hours worked or if it is earned by employees on a schedule, such as annually on an anniversary date. Depending on how paid time off is earned by employees, it may be favorable to accrue vacation time more often to ensure the books are up-to-date and accurate.

This accrual can take place as often as per pay period, monthly or quarterly, but must be performed at least once a year to ensure accurate year-end financials. To accurately accrue for each employee’s vacation time, you should keep up-to-date information on employee pay rates and existing unused vacation hours. At the end of the reporting period, the amount of unused vacation time for each employee should be multiplied by their current pay rate to determine the total accrued liability balance that should be maintained on your balance sheet. Future expected pay rates may also be used as those reflect the rates that future vacation time will be taken. Most often, we see companies that will simply record a true-up entry for this balance at the end of the reporting period and don’t touch the account as part of recording their regular payroll.

Many available payroll software providers track employees accrued unpaid time off. As such, this system will likely be automated, however ensuring that the time off accrued is correct, is properly following internal policy and reviewing related activity for reasonableness should be your company’s responsibility. In those instances, you can simply true-up the accrued paid time off liability balance to the reporting provided by your payroll provider.

If you have questions on how to track accrued paid time off, contact your Henry+Horne advisor.

Darcy Mayo