Liabilities for unused time off mount as pandemic lingers

During the pandemic, many employees have postponed using their allotted paid time off until COVID-related restrictions are lifted and safety concerns subside. This situation has caused an increase in accruals for certain employers. Here’s some guidance to help evaluate whether your company is required to report a liability for so-called “compensated absences” and, if so, how to estimate the proper amount.


Balance sheet effects


Compensated absences include:

  • Paid vacation,

  • Paid holidays,

  • Paid sick leave, and

  • Other forms of time off earned by employment.

Accruals for compensated absences are classified as other liabilities on companies’ balance sheets. The liability also creates a deferred tax asset equal to the accrual times the effective tax rate, because companies can’t deduct paid time off until it’s actually paid under U.S. tax law.


When to book an accrual


Before quantifying the compensated absences liability, review your company’s policies and procedures related to paid time off. Does your company allow employees to accumulate unused paid time off, beyond year end, for use in future years? Does the company provide vesting rights to accumulated paid time off balances that require payout after employment is terminated? If you answered “yes” to either question, you may be required to record a compensated absences accrual.


Specifically, under U.S. Generally Accepted Accounting Principles (GAAP), employers should accrue a liability for an employee’s right to receive compensation for a future absence if these four conditions are met:

  1. The employee has earned the right to time off, but they’ve not taken that time off.

  2. The employee’s rights accumulate or vest.

  3. It’s probable that employees will exercise their rights to paid time off, triggering payment.

  4. The employer can reasonably estimate the amount of benefits the employee will receive.

You also must consider applicable laws in the states and countries where your employees live. In some cases, these laws may supersede your company’s policies and practices.


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