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Accounting for Compensated Absences

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Accounting for Compensated Absences

 Statement of Financial Accounting Standards No. 43
        "Accounting for Compensated Absences"
        Issued in November 1980

 What are Compensated Absences?

     Compensated absences mean 
           --> employee absences for which employees will be paid 
     Examples of compensated absences 
           --> vacation, illness, holidays

 When is an expense recognized for such payments?

     Expenses are recognized 
          --> in the period when employees provide services
                to be qualified for compensated absences.

     If employees did not use all of such compensated absences
          --> a liability is accrued for unused portion.

     Liability is accrued when all of the following conditions are met:

           a.  Services already rendered (by employees)
           b.  Rights that vest or accumulate
           c.  Payment is probable
           d.  Amount can be reasonably estimated.

     Vested rights 
           --> not contingent on an employee's future service
           --> should be paid when an employee leaves
          --> unused (but earned) rights to be carried forward to future periods

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