Compensated absences

Compensated absences - The California State University GAAP...

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The California State University GAAP Reporting Manual Effective June 2009 S ECTION 4-8 C OMPENSATED A BSENCES O BJECTIVE OF GAAP A DJUSTMENT The objective of the GAAP adjustment necessary at June 30 related to compensated absences is: To record an accrual for absences from employment, including vacation and other salary related payments, for which it is expected that employees will be paid (on termination or retirement). O VERVIEW For GAAP financial reporting purposes, a liability must be accrued for the cost of compensation for future absences if all of the following conditions are met : a. The employer’s obligation relating to an employee’s rights to receive compensation for future absences is attributable to employee service already rendered. b. The obligation relates to rights that vest or accumulate. c. Payment of the compensation is probable. d. The amount can be reasonably estimated. If an employer meets conditions (a), (b), and (c) but does not accrue a liability because of an inability to meet condition (d), that fact should be disclosed. Vested vs. accumulated rights. Vested rights exist when an employer has an obligation to make payment to an employee even if the employee’s employment is terminated. Thus, vested rights are not contingent upon an employee’s future service. Accumulated rights are those that can be carried forward to future periods. Both vested and accumulated rights should be booked as a liability. The distinction between vested and accumulated is that in accumulated rights the estimated liability can allow for forfeitures due to turnover. Vacation. The expense and related liability for compensated absences should be recognized in the year in which the right to receive the vacation is earned by the employees. This means that if new employees receive rights to two weeks paid vacation at the beginning of their second year of employment, the vacation pay is considered earned during the first year of employment. In the CSU, vacation is accrued on a monthly basis, not given out at one time. Accrual rate: The CSU can use an employee’s current pay rate or an estimated future rate in
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Compensated absences - The California State University GAAP...

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