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GAAP and unlimited vacation time

Our business is located in CA. We would like to move from a PTO policy to unlimited vacation time for VP's and above. Are there any regulations or risks that we would be assuming by having an unlimited vacation policy of executives? Would we still be required to account for the time from a financial perspective?

Answers

Carrie Roesner
Title: Controller and VP
Company: Centro
(Controller and VP, Centro) |

I think the accounting treatment would depend on if you would pay out employees if they leave. For example, if someone leaves in June and did not take any vacation, would you pay out anything to them? If the answer is yes, then you should be accruing for unused time. If not, then I think you can document that the assumption is that people are taking the vacation as they are earning it and since the company has no liability to provide payout, then there would be no accrual needed.

Also, as you may be aware, there are specific laws in CA that allow employees to rollover vacation (I think indefinitely) so I would make sure the policy addresses this item and complies with the state laws. Again, if people would have an "unused" balance at the end of the year to rollover (which I'm guessing they wouldn't if it's unused), you would need to accrue.

Didier Jupillat
Title: CFO
Company: Atlantic.net
(CFO, Atlantic.net) |

I don't know the specific employment laws in CA, but from a Balance Sheet perspective, I'd say your major issue would be to define a certain level of "maximum benefits liability", if you're even concerned about that.
If you are, I believe you should define very precisely how many PTO days you will be willing to pay out as part of the "termination package" if any of your executives leave the company. Whatever that number is, it will affect your benefits liability account.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Good answer by Carrie. The principle behind this is that potential liability needs to be reflected on the balance sheet. When employees have a right to a payout of paid time off upon termination, the company has a potential liability that needs to be recorded. That's the only reason you would have to record accrued paid time off.

As Carrie stated, if there are laws in your state that mandate employees' rights to save up PTO, you'll have no choice but to accrue for that possible liability.

I've always been in favor of use-it-or-lose it PTO policies, and favor extending liberal PTO benefits. Employees should be encouraged to get away from the office at least a few weeks a year. I don't like the idea of using accruals as a savings bank to be cashed in when the employee leaves. The purpose of vacation time is to allow people to recharge. We in finance should adopt policies that encourage that to happen.

Related to this is payroll cycles. I try to make sure that the last day of the period is the end of a payroll cycle. Same rationale: eliminate the need for accounting for unpaid liabilities.

Anonymous
(VP, Human Resources) |

Thank you for your response. We would propose that the employees (VP's & above) would have no right to a payout upon termination. Therefore, we would not need to accrue the time on books as a liability.

While we would love to have a use it or lose it policy for the remaining employees, the state of CA does not allow it. It is a shame because many of our employees use it as a means to save money and get paid out upon termination. We do have a cap on the number of accrued days, which is allowed by the state.

Thanks again for your response.

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