Question

Under what conditions must an employer accrue a liability for the cost of compensated absences?

Short answer

An employer accrues a liability when the following is possible:

• Services rendered get them the future compensation leaves
• Estimation of the amount
• Payment is probable
• Employees’ rights that accumulate

Step-by-step solution

Accounting for Compensated Absences

Compensated absences are paid absences. The employees have the privilege of carrying forward those unused leaves by them in the current period. They are also vested with the right to compensate for absences during termination.

Conditions to accrue a liability for Compensated Absences

An employer will have to accrue a liability for compensated absences payable only when the following conditions are met:

• Employees have rendered the services that earned them the right to future compensated absences. The payment obligation is based on this.
• The amount of obligation can be reasonably estimated
• Payment is probable
• The obligation is for employees’ rights that vest or accumulate

When there are non-vesting rights, and the rights expire at the end of each year in which they are earned, then they need not accrue a liability for future absences since there may be no related payout to employees.