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Accounting laws related to accrued vacation balances

Accounting For Accrued Vacation BalancesFor years my company had a accrual vacation program - so many hour per pay period with a maximum carry over of 240 hours into the next year. Recently it was announced that the accrual program was being suspended and everyone would get a specific number of hours per year to use (use it or loose it). This was done with very short notice and no real chance of using up any accrued balances. People's accrued balances would be held until they left the company. My questions is - this accrued balance for all employees was a line item on the quarterly report - a liability. What are the laws regarding this unpaid balance of vacation to all employees - must it continue to be a line item liability going forward or is there some accounting magic that can happen to make it disappear from the balance sheet?

Answers

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Anon,

Depends on your State of corp, the location of the employees, what the employment contracts said, what the original policy said, and how the transfer was documented and handled.*

From the way you describe it, it is a liability contingent on the departure of the employees: fine. That's clearly a non-current liability (imho). Your auditors may even want you to estimate a current portion. Yay!

However, if it is turned into a policy on exit bonuses, and everyone signs off, it is very likely that you can then take it off the balance sheet (maybe).

Note, one transition I made similar to this, we simply paid off the accrued balances (but that was specific to the requirements of the jurisdiction).

Note, if its purely policy (eg, in the employment agreements, you say, "you will get the benefits as stated in company policy, which will be updated from time to time"), you can force the employees to use the vacation...of course this could have unintended consequences.

As it is, it seems to me it must stay. Seems a bit annoying to track, but, oh well.

Note, in a bad year, this could give people an added incentive to depart (eg, I'll take my 240 hour bonus and a new job, doubling down on 6 weeks of pay!). It could be advisable to get rid of this thing.

Cheers,

KP

*maybe depends on other stuff too....that's my short list of where to look.

Jack Judd
Title: Retired
Company: Retired
(Retired, Retired) |

This is unique. In my experience when a switch was made like your company did, employees were given one or two years to use it up or lose it. I personally would argue that it is a current liability as you do not know maturity of the obligation - it could be paid out at any time if the employee leaves.

Anonymous
(Controller) |

You need to look at FAS43.

Anonymous
(SVP Global Operations) |

I'm the OP - thanks for the input.

The most recent quarter results were announced the other day and I see that "accrued compensation" was still a line item on the new report (down a few million from the previous quarter).

My concern was that dollar amount could/would magically disappear in an accounting shuffle.

We were only given a few weeks notice which is very unusual I've heard. Everyone wishes they would just pay it out as it doesn't seem safe in the event of a merger, buyout or bankruptcy. But we have been told it will be paid out when the person leaves the company. Definitely need to keep this in mind if things start to look bad.

One would think getting the liability off the books would be good, but I suspect it's not favorable because it would have to come out of the cash on the assets side of the balance sheet, which is currently only about 4x what is listed as the accrued compensation liability.

Again - thanks for the input.

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