Conditions to Accrue a Compensated Absence
Candidates studying for the CPA exam should understand the four conditions that must be met for a company to accrue for a compensated absence (sick day, vacation, PTO, jury duty, etc.).
Below is your mental map to help you establish a thought process for going through and assessing if the four conditions are met:
#1 Payment to employee is probable: This condition means that the employer will compensate the employee for the compensated absence through cash payments at termination or retirement. In other words, if the employee has earned but not used $1,000 of compensated absence, then the company would pay the $1,000 in cash if the employee is terminated or decides to leave the company. If there is no obligation to pay out the cash, then the company would not accrue for the compensated absence.
#2 Reasonably estimate amount that is owed: This condition focuses on whether the company can reasonably calculate the payment that would be owed to the employee if they were to be paid in cash (see #1). Most companies estimate the liability using the employees salary or hourly pay.
#3 Services must have been performed: This condition means that the employee must have performed the service to earn the compensated absence. For example, for each month of service performed, the employee would earn 2 days of compensated absence. The company CANNOT accrue based on future services.
#4 Obligation is for employee rights that vest or accumulate: This condition means that the employee can use the compensated absence and it does not expire. Some companies may state that a compensated absence expires at the end of each calendar year.
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