“Compensated absences” refers to employee absences for which employees will be paid, including vacation and sick leave. Expenses are normally recognized during the period for which the employee provides services qualifying that employee for compensated absences. If the employment policy specifically dictates, a liability is accrued for unused portion of such compensated absences. Liabilities are accrued when all of the following conditions are met:
- Services have already been rendered by the employees;
- Rights have vested or accumulated; (rights are considered vested if those rights are not contingent upon an employee’s future service and would be paid to the employee when that employee leaves service; rights accumulate when they are earned, but unused, and may be carried forward to future periods).
- Payment is probable; and
- Amount can be reasonably estimated.
It is vital that an entity’s personnel manual or handbook include specifics for any such policy. It should include the formula for earning vacation and sick pay, the maximum annual accruals permitted, and the policy for payment, if permitted, of each category upon the termination of employment. For the entity recording the liability to its books for such compensated absences, the following guidelines should be used:
Vacations: accrue a liability for leave earned and vested, but not used at year-end.
Sick leave (and similar absences, if vested): accrue a liability to the extent that an employee would be compensated for such benefits through cash payments conditioned on employee termination or retirement.
The compensated absences liability should be calculated based on the pay rate in effect at the date of the Balance Sheet or Statement of Net Assets. The accumulations should be reduced to the maximum amount allowed as a termination payment. Salary-related payments which are associated with the payment of compensated absences, such as employer’s share of payroll taxes, must also be accrued.
Governmental Funds – recognize expenditures each period using the modified accrual method of accounting – expenditure is recognized equal to the net amount accrued during the year that normally would be liquidated with expendable available financial resources.
Proprietary Funds and Government-wide Financial Statements –compensated absences liability should be comprised of two components – amounts currently due within one year and amounts due in more than one year (the non-current portion). The expense for vacation leave is recorded when earned.
Our professionals have many years of experience working with the government industry. If you have concerns about compensated absences at your organization, don’t hesitate to contact a Henry+Horne professional adviser.