Compensated absence is as the name implies, the employer’s offering of time off with pay to employees. As the employee prepares for how they will use their time off an employer must also account for it properly regardless how the employee uses that time.
As stated from GASB Statements 16 and 34, governments must account for employee absences, such as vacation, illness and holidays, for which it is expected that employees will be paid.
Why is this needed?
The purpose of recording for compensated absences is so organizations properly recognize compensation in the period incurred. For most organizations, paid vacation is an allowance that accumulates from year to year. From year to year an employee may have received a salary increase, increased paid vacation time, or decreased paid vacation time. Then if an employee leaves or is terminated, your organization will know how much to compensate them based on their unexercised paid vacation time.
When does it need to be recorded?
- The employee has a predetermined rate and right to receive compensation for future absences from the employer as the employee renders services.
- The obligation to the employee accumulates.
- Payment of compensation is probable.
- The amount can be reasonably estimated.
However, if your organization’s process for compensated absence expires at the end of the year in which it is earned or has non-vesting rights, you do not have to accrue a liability as earned. Instead the expense should be recorded as incurred.
How is it recorded?
When the aforesaid measures are met then you must record for compensated absence to all applicable employees in your accounting software. To begin, record an accrued liability while all your employees are working as a lump sum and a relatable expense account. Adjust the accrued liability and related expense amount as needed throughout the year based on turnover, forfeitures to vacation, and when employees use their vacation time.
If an employee decides to leave or is fired and still has unexercised paid vacation time, then you must compensate them based on their unexercised paid vacation time. Once the obligation to compensate them is fulfilled then then accrued liability first recorded can be terminated.
GASBS 34 can be a great resource for guidance and questions on reporting in Government-wide Financial Statements, Proprietary and Fiduciary Funds, and Governmental Funds.
The following link is also a great resource to stay informed of any changes being made, such as consideration of topics related to measurement of a liability, and discussion of note disclosure requirements by the Board:
If you need further information regarding compensated absence, please reach out to one of our governmental auditors and we can help you out.
Stephen Sinn and Sarah Melone