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Signing Bonus Accounting

signing bonus accountingWhen do you accrue / recognize expense associated with a signing bonus?

A company make an offer of employment which includes a signing bonus of $XX. The employee accepts the offer prior to year-end; however, the signing bonus is not payable until the employee begins employment which is in the month following year-end. There is a divided thinking amongst the accounting team. Certain believe that whereas the Company has a signed agreement and the amount is substantial, the amount is therefore probable to be paid and accordingly required to be accrued prior to year-end. Others believe that since the signing bonus is conditioned upon beginning employment, recognition is not required until such time the conditions have been met. All are in agreement that the expense is to be recognized ratably over the period to be earned (The employee will need to return the signing bonus if leaves prior to the 1st anniversary of employment.)

Answers

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

Since it will be recognized ratably over the one year, you should recognize this when the employee reports for the first day of work. You would then Dr. Prepaids-Signing Bonuses and Cr. Cash. As you recognize the expense, amortize the prepaid accordingly.

Ted Monohon
Title: VP -Finance / Controller
Company: Fantex
(VP -Finance / Controller, Fantex) |

It is hard to argue that you have a liability prior to when the person starts working for you despite the signed employment contract. Additionally, you have not had any benefit from the potential employee's work (matching principle) so it is hard to argue you have an asset or liability (prepaid bonus compensation or signing bonus payable). If you were to recognize it in the current year (before employment), what would the offset to signing bonus payable? Not bonus expense.. not prepaid bonus. It points to not booking it in the current year.

Just realize that you will have different GAAP / Tax treatment stemming from this. The compensation will be on the employee's W-2 and you will get tax deduction for the entire bonus paid.

Also realize that unless it is truly a large signing bonus, the ability to collect this back from an employee is really difficult in the real world. The bonus is typically forgiven as part of the separation agreement. Your mileage may vary, but I have yet to have seen a sign on bonus collected after not meeting the milestone. It simply isn't worth the legal battle that ensues.

Good luck!

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

I agree with the two responses so far. It would be hard to make a case for recording anything as a 2013 expense since all the conditions have not been met yet.

Depending on who the hiree is and the nature of their job, you may have a material contract that needs to be filed if you are a public reporting company. If the signing bonus is material it may merit mention in Management's Discussion and Analysis of Financial Condition.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

Based on the facts as described, the Company has a commitment at year end, but not a liability. It's somewhat similar to an open purchase order where the Company has entered into a contract with a supplier but no liability exists until the supplier delivers the goods or services.

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