Question

When considering accrual of compensated absences, what is meant by the term “vest?” By the term “accumulate?” Do both of these conditions need to be present in order for an employer to be required to accrue a liability for the cost of compensated absences?

Answer 1

A compensated absence is employee time off with pay, which can arise in such situations as sick leave, holidays, vacations, and jury duty. To account for compensated absences, it is not necessary to separately recognize them when they are earned and used within the same period, since it is typically rolled into the general compensation expense. However, they must be charged to expense and recorded as a liability when they are earned and their use is deferred to a later period.

An employer should accrue a liability for compensated absences payable to employees for their future absences, but only if all of the following conditions are met:

The payment obligation for future absences is based on employee services already rendered

The amount of the obligation can be reasonably estimated

Payment is probable

The obligation is for employee rights that vest or accumulate

When calculating the amount of the accrual, you can factor in the amount of anticipated forfeitures. Also, you should record the accrual in the year in which employees earn the compensation. If the cost associated with an expected compensated absence is immaterial, as is typically the case with jury duty compensation, it is not necessary to accrue the expense in advance; instead, these costs are charged to expense as incurred, and should have no notable effect on the income statement.

If a compensated absence has non-vesting rights and the rights expire at the end of the year in which they are earned, then you do not have to accrue a liability for future absences, since there may never be a related payout to an employee.