Question

b. Audio Waves Ltd. has five employees who have been extremely busy during the current fiscal year, which ends on December 31, 2020. Each employee is entitled to 2 weeks' vacation in return for working 50 weeks. Audio Waves has a weekly payroll of $10,000, and as of December 31, 2020, none of the employees has taken vacation leave. How should this liability be reported on the company's statement of financial position on December 31, 2020?

Answer 1

Statement of Financial Accounting Standards No. 43 issued by FASB provides guidance in this regard.

Paragraph 6 of the standard provides that :

An employer shall accrue a liability for employees' compensation for future absences if all of the following conditions are met:

a. The employer's obligation relating to employees' rights to receive compensation for future absences is attributable to employees' services already rendered,

b. The obligation relates to rights that vest or accumulate

c. Payment of the compensation is probable, and

d. The amount can be reasonably estimated.

It is further provided that If an employer meets conditions (a), (b), and (c) and does not accrue a liability because condition (d) is not met, that fact shall be disclosed.

In view of the above in the provided cases all 4 conditions are fulfilling hence Audio waves need to accrue liability for carry forward vacation leaves which can be used in coming years.

The accrued liability will be calculated as under :

Weekly Payroll Amount X Number of weeks Vacation leave pending

10000*2 = 20,000

Audio Waves needs to show Accrued vacation liabilities in their statement of financial position as on December 31, 2020.