*This is Part 1 of a 2-part blog. Each part addresses the fundamental requirements and techniques for application related to the standard, and provides specific examples.
- This Part 1 addresses measurement of the costs of compensated personal absence.
- Part 2 will address the assignment and allocability of the costs of compensated personal absence.
Background: This standard provides the criteria for measuring, assigning, and allocating the costs for vacation, sick leave, holiday, and other compensated personal absence. Although the purpose section of the standard only mentions measurement, the fundamental requirements and techniques for application provide criteria related to measurement, assignment, and allocability.
The standard includes the following key definitions that establish the basis for the criteria contained in CAS 408.
- Compensated Personal Absence – Any absence from work for which an employer pays compensation directly to an employee in accordance with a plan or custom of the employer (CAS 408-30(a)(1)).
EXAMPLE: Examples of compensated personal absence include illness, vacation, holidays, jury duty, military training, and personal activities.
- Entitlement – An employee’s conditional or unconditional right to receive a determinable amount of compensated personal absence or pay in lieu thereof (CAS 408-30(a)(2)).
EXAMPLE: For every two weeks of work, an employee receives the right to take two hours off from work with pay. Any unused hours are payable upon retirement or employment termination. The entitlement is two hours pay for every two weeks of work, since this is what the contractor is liable for.
- In accordance with CAS 408-50(c)(1), the measurement of compensated personal absence is equal to the total amount the contractor is obligated to compensate the employee. This is also referred to in the standard as the “Measurement of Entitlement”.
EXAMPLE: A contractor provides employees with five days of vacation and five days sick leave per year. Employees are paid for any unused vacation and sick leave when they retire or upon employment termination. In estimating the liability, the contractor must include both the vacation and sick pay in the computation, since this is the total amount of the liability.
- CAS 408-50(c)(2) requires that the “Measurement of Entitlement” be reduced to allow for anticipated non-utilization.
EXAMPLE: A contractor provides employees with 10 days of vacation leave per year. The employees may carry-over their accumulated vacation leave up to a maximum of 20 days. Historically, employees have lost 5% of their accumulated vacation leave. During 2013, employees earn $100,000 in vacation leave. The vacation leave must be reduced by $5,000 (5% x $100,000) to reflect the anticipated non utilization. The compensated personal absence cost for sick leave during 2013 would therefore be $95,000 ($100,000 less the $5,000 for anticipated non-utilization).
- In accordance with CAS 408-50(c)(3), the “Measurement of Entitlement” is estimated consistently in terms of current or anticipated wage rates.
EXAMPLE: A contractor pays each of its employees $30 per hour. During 2012, the employees earned 500 hours of vacation leave. The contractor has a policy that measures the entitlement using current wage rates. Thus, for 2012, the personal absence cost under CAS 407 is $15,000 ($30 per hour x 500 hours).
EXAMPLE: A contractor has a cost accounting period that ends on June 30 of each year. The contractor pays each of its employees $20 per hour. The contractor historically provides a 10% raise to each of its employees as of January 1 of each year. Employees are granted 100 hours of leave a year. The contractor has 100 employees. The contractor has a policy of measuring the entitlement using anticipated wage rates. The contractor therefore should compute the vacation leave costs as follows:
|Period||Wage Rate||Hours Earned||Vacation Costs Per Employee||Number of Employees||Vacation Cost for All Employees|
|Jan 1 – June 30||
($30 x 50)
|July 1 – Dec 31||
($30 x 110%)
($33 x 50)
Under CAS 408, the compensated personal absence cost for vacation is $315,000.
- As stated in CAS 408-50(c)(3), estimates of anticipated wage rates may be made for individual employees, but are not required if the total cost with respect to all employees in the plan can be estimated with reasonable accuracy using sample data, experience, or other appropriate means.
EXAMPLE: A contractor has 200 employees. Employees earn 80 hours of vacation on their anniversary date of employment. The contractor records vacation expense every two weeks as part of the payroll computations. During the two week period ending June 30, 2013, 10 employees had their anniversary date. The contractor has a policy of using an average wage rate to compute leave earned. The total payroll for the period was $200,000. Each employee works 100 hours a pay period. The contractor therefore computes its vacation cost as follows:
Total Payroll $200,000 (A)
Number of Employees 200 (B)
Cost Per Employee $ 1,000 (C = A/B)
Hours Worked 100 (D)
Hourly Rate $ 10 (E = C/D)
Vacation Hrs Earned 800 (F) (80 hours x 10 employees)
CAS 408 Cost $ 80,000 (G = E x F)