Your Ask Joey ™ Answer

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.

Back To All Questions

You might also be interested in...

  • CECL Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on CECL for debt securities, please click the link below to download the Excel workbook: CECL Calculation workbook (Universal CPA Review)

  • Journal Entry for Direct Materials Variance

    Journal Entry for Direct Materials Variance In the current year, Mission Burrito budgeted 6,000 pounds of production and actually used 4,000 pounds. Material cost was budgeted for $5 per pound and the actual cost was $8 per pound. What would the debit or credit to the direct material efficiency variance account be for the current...

  • Understanding Variance Analysis

    Variance Analysis Variance analysis is a method for companies to compare its actual performance vs its budgeted amount for that cost measurement (related to the flexible budget). The differences between the standard (budgeted) amount of cost and the actual amount that the organization incurs is referred to as a variance. By analyzing variances, the company...