Accrued Compensated Absences – We Owe How Much?

By now you are probably well aware that you must include in your statement of financial position or “balance sheet” a liability for all unpaid personal time earned by employees as of the fiscal period end date. As an auditor, I sometimes have the messenger’s task of advising first time audit clients that they must make a liability provision for unpaid compensated absences.

The Government Accountability Office (GAO) cites the exclusion of this important liability as a major deficiency in Single Audit reports.

Accrued compensated absences are liabilities undertaken by an organization when it agrees to provide employees with certain types of personal leave time in the form of a fringe benefit. An employer who provides sick days, vacation and holidays, and personal days, also determines the conditions under which these days may be used. For example, perhaps sick days cannot be used during the first 90 days of employment. Or, vacation time is not earned until the employee has been with the organization for 60 days.

In these instances, the employer has granted a fringe benefit to the employee with specific service time attached to the benefit before they can be used. Furthermore, the employer may indicate that unused benefits do not carry beyond a time limit for future use, the so-called “use it or lose it” rule. If a benefit is not at risk of being lost due to its non-use, then the benefit accrues and is “earned” by the employee. It is this type of situation that makes it necessary to recognize “accrued compensated absences.”

Four conditions must be met in order to recognize the accrued liability:

1- The employees’ right to receive compensation is attributable to services already rendered

2- The rights vest or accumulate

3- Payment of the compensation is probable

4- The amount of the payment is reasonably estimated

Once these conditions are met, the organization has a responsibility to recognize the accrued liability in the statement of financial position. The theory behind this requirement is that if the organization were to close its doors as of the last day of the fiscal period, they would have a liability to compensate employees for any earned, but unused compensated absences.

Automated payroll systems make it easy to determine the liability calculations. To ignore the obligation and not record it in the financial statements may materially misstate your audit report.

(Visited 72 times, 1 visits today)
Tuesday, April 11th, 2017