The global pandemic’s effects are still being felt in many areas. One such area is in the realm of accounting; specifically, the area of compensated absence.
What is compensated absence? It’s vacation and sick time. Many employees deferred vacation time during the pandemic since travel was so restricted. The result is a higher than usual amount of accrued compensated time off, which must be accounted for logically and systematically.
There are no FASB standards for the rate at which such time is accrued. Instead, organizations are urged to look at their record of accounting for such time off. Accountants may choose from the current rate or the likely compensation rate when employees are expected to redeem their vacation days.
The latter is easier said than done. Even though better awareness, knowledge, and testing for COVID-19 have kept much of the nation open, some employees may still be reluctant to take their vacation time. Nonprofits must develop a plan of action to handle the accrual of compensated time off.
Develop Your Plan for Compensated Time Off
To develop a plan for compensated time off, first, review your current definition of such time.
- How does your organization define compensated time off? Many define it as vacation time, sick days, or personal days. Review your organization’s current definition and method of acquiring time off. For example, is vacation time off based on the number of days worked, or do all employees receive the same amount of time at the start of the calendar or fiscal year?
- Does your policy allow employees to roll over such time and, if so, how long can they accrue it?
- If they cannot roll over the time but must “use it or lose it,” are they compensated for it instead?
- Have you made any emergency declarations, i.e., special arrangements, for employees during the pandemic?
- Have you reviewed both accrued and vested rights? Are these in line with state and local laws and requirements?
Once you have the facts about your current policies and understand fully all of the considerations for paid time off, think about the following as you create your plan to account for compensated time off.
Accrual for Compensated Time Off
Take into account the substance and spirit of your organization’s vacation and sick leave policies, rather than the actual form. Does your organization provide a generous policy that goes above and beyond the legal rights of employees as governed by state and federal law? If so, then the liability for compensated time off should include all reasonable compensation likely to be paid.
Accountants should use historical data pertaining to compensating employee absences to make projections about the potential of unused accrued time off. This information can be used to estimate the value of lapsed compensated absences.
A spreadsheet can be helpful to estimate the possible adjusted journal entries. Having a computerized accounting system will also make the estimation process easier. Historic reports will show the average balance for accrued vacation and unpaid sick leave, which can be used as a basis to adjust for any anticipated increase due to the unusual years, thanks to COVID-19.
Welter Consulting
Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.
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