*This is Part 2 of a 2-part blog.  Each part addresses the fundamental requirements and techniques for application related to the standard, and provides specific examples.

  • Part 1 addressed measurement of the costs of compensated personal absence.
  • This Part 2 addresses 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.

Assigning Cost of Compensated Personal Absence to Accounting Periods

  • CAS 408-40(a) and CAS 408-50(b)(1)) require that the costs of compensated personal absence be assigned to the accounting period in which the employer becomes liable to compensate an employee if the employer terminates the employee’s employment for other than disciplinary reasons

EXAMPLE: An employee earns five personal days per year and is entitled to carry-over as many days as they want to subsequent years, and is paid in cash for any unused days upon retirement or employment termination.  The average employee uses three personal days per year.  The contractor must assign the cost of five personal days per employee to each accounting period, since that is how much the employee earns.

  • In accordance with CAS 408-50(b)(1)), when an employee has to complete a probationary period before the employer becomes liable, the contractor may assign the costs of compensated personal absence during the probationary period, provided the practice is consistently applied 

EXAMPLE: An employee earns five personal days per year.  However, if the employee is terminated or leaves the company during the first two years of employment, the employee is not entitled to payment for any unused personal days.  The average new employee uses three personal days in his/her first year of employment.  The contractor’s policy can provide for either (1) recording the entire five days for each new employee, or (2) recording compensated personal absence for new employees during the first two years of employment only when actually taken.  Whichever policy the contractor chooses must be consistently applied to all new employees.

  • As stated at CAS 408-50(b)(2), when a plan provides for entitlement to be determined as of the first calendar day or the first business day of a cost accounting period based on service in the preceding cost accounting period, the costs shall be recognized in the preceding cost accounting period. 

EXAMPLE: A contractor has an accounting period that ends on December 31.  The contractor’s policy states that employees that are on board as of January 1 of each year earn six days of vacation leave that they can use as they choose, or be paid for any remaining balance when they retire or leave the company.  On January 1, 2013, the contractor estimates that the cost of the six days of vacation leave earned for each employee on board as of January 1, 2013 totals $100,000.  The $100,000 must be assigned to the cost accounting period ending December 31, 2012, in accordance with the provisions of CAS 408, i.e., under CAS 408 those vacation days were earned during Calendar Year 2012.

  • In accordance with CAS 408-50(b)(3), when an employer liability does not exist in advance of payment, the compensated personal absence shall be assigned to the accounting period in which it is actually paid.

EXAMPLE: An employee earns five days of sick leave each year. The employee may carry-over as much leave as he/she wants, but is not paid for any unused sick leave on retirement or employment termination. Since the contractor is not liable for the sick leave, the sick leave is assigned to the period in which it is actually used by the employee.

EXAMPLE: A contractor has a policy that, in addition to their earned vacation time, employees will be given paid leave for emergency family needs, with the specific amount of hours/days determined on a case-by-case basis as approved by the employee’s supervisor.  The costs associated with the emergency family leave are assigned to the accounting period in which the leave is taken, since the contractor has no liability until that time.

  • Under CAS 408-50(a), each plan or custom is considered separately in determining the period to which the costs must be assigned.

EXAMPLE: A contractor has a plan that entitles the employee to five days of vacation per year.  The contractor also provides employees with sick leave if the sick leave is approved by the employee’s supervisor.  The assignment of costs to accounting periods must be evaluated separately for the vacation versus the sick leave.  The five days of vacation would be assigned to the cost accounting period in which the employee earns the vacation time.  The sick leave would be assigned to the accounting period in which it is actually taken, since the employer does not have a liability for the sick leave until it is actually taken. 

  • As stated at CAS 408-50(d)(1), special considerations apply when a contractor is first subject to CAS 408 (e.g., a contractor was previously using the cash basis of accounting and complying with CAS 408 will result in a significant increase in personal absence cost).  CAS 408 does not permit this entire increase to be assigned to the cost accounting period that the contractor is first subject to CAS 408.  Rather, CAS 408 requires that this increase be held in a suspense account and assigned to accounting periods in accordance with the provisions of CAS 408-50(d)3) (see description and example below regarding CAS 408-50(d)(3)). 

EXAMPLE: A contractor that has a cost accounting period ending December 31 became subject to CAS 408 as of January 1, 2013.  The contractor has been using the cash basis of accounting prior to January 1, 2013.  As of December 31, 2012, unused employee vacation accounts, computed on an accrual basis, totaled $150,000.  The standard requires that this $150,000 be held in a suspense account.

  • As required by CAS 408-50(a)(2), if a new or changed plan/custom is adopted, the costs of the compensated personal absence for the new or changed plan/custom are assigned to the period in which the employer becomes liable to the employee, beginning with the first cost accounting period in which the new or changed plan/custom applies.

EXAMPLE: A contractor has a cost accounting period that ends on March 31 of each year.  The contractor changes its plan effective January 1, 2013.  Under the former plan employees earned five days’ vacation and five days sick leave per year.  Under the new plan, employees earn twelve days of personal leave per year (the concept of two types of leave, vacation and sick, has been eliminated).  The costs of the new plan are computed beginning with April 1, 2013.  

  • Under CAS 408-50(d)(2), special considerations apply when the contractor changes an existing plan or institutes a new plan such that the liability for past years is increased. CAS 408 does not permit this entire increase to be assigned to the cost accounting period that the contractor is first subject to CAS 408.  Rather, CAS 408 requires that this increase be held in a suspense account and assigned to accounting periods in accordance with the provisions of CAS 408-50(d)3) (see description and example below regarding CAS 408-50(d)(3)).

EXAMPLE: A contractor has a cost accounting period that ends on December 31.  The contractor changes its plan effective January 1, 2013.  Under the former plan employees earned five days’ vacation and five days sick leave per year.  Employees accumulated both vacation and sick leave.  The maximum vacation days that could be carried over to the next calendar year was 15 days.  Any unused vacation leave was payable upon retirement or employment termination.  Any unused sick leave was lost upon retirement or employment termination.  Under the new plan, employees earn nine days of personal leave per year (the concept of two types of leave, vacation and sick, has been eliminated).  The amount of personal leave that can be carried over to the next year is unlimited, and any unused personal leave is payable upon retirement or employment termination.  In addition, any balances of vacation and sick leave in existence as of January 1, 2013 become personal leave (e.g., an employee with 12 days of vacation leave and 20 days of sick leave would have it converted to a personal leave balance of 32 days).  The plan change increases the contractor’s liability by $250,000.  This $250,000 must be placed in a suspense account.    

EXAMPLE: A contractor that has a cost accounting period ending December 31 institutes a new plan as of January 1, 2014.  Under this plan, employees are entitled to fifteen days of vacation per year, as opposed to the current plan that provides for eight days.  Employee accounts are also increased for each of the two prior years, i.e., the plan applies as of January 1, 2012.  The additional cost of this plan totals $300,000.  The contractor is required to place the $300,000 in a suspense account.

  • In accordance with CAS 408-50(d)(3), when the contractor establishes a suspense account, the amount held in that account shall be reduced at the end of each cost accounting period.  The reduction shall equal the difference between the amount held in suspense at the beginning of the cost accounting period and the employer’s liability at the end of that cost accounting period.  The reduction in the suspense account represents an increase in compensated personal absence, and is assigned to the cost accounting period in which the suspense account was reduced.

EXAMPLE: A contractor that was required to comply with CAS 408 as of January 1, 2013, establishes a suspense account with $150,000.  The $150,000 represents accumulated employee vacation as of December 31, 2012.  During 2013, employees earned vacation totaling $170,000.  At the end of 2013, accumulated unused employee vacation is $140,000.  The adjustment to the suspense account is determined as follows:

Beginning Suspense Account                  $150,000

Ending Liability                                        $140,000

Reduction in Suspense Account              $ 10,000

 

Vacation Expense for 2013:

Earned During 2013                                            $170,000

Add:  Reduction in Suspense Account              $ 10,000

Total CAS 408 Vacation Expense for 2013         $180,000

 

Note that if the contractor’s liability at the end of the year is greater than the amount in the suspense account, there is no reduction in the account.  Thus, if the contractor’s liability continues to increase each year, the suspense account is never reduced.  For example, assume the suspense account was established on January 1, 2013 with a balance of $50,000.  Assume further that the employer’s liability at the end of each year from 2013 to 2024 is greater than $50,000, with a peak of $275,000 in 2024.  In this case, the suspense account would remain at $50,000, and would more than likely stay at that amount until the contractor undergoes a major reorganization and/or layoff of employees, or the business segment is closed.

 

Allocating Cost of Compensated Personal Absence to Cost Objectives

  • CAS 408-50(e) and CAS 408-40(b) require that the costs of compensated personal absence be allocated on a pro-rata basis that reflects the total of such costs and the total of the allocation base for the entire cost accounting period.

EXAMPLE:  A contractor accumulates vacation pay in a single account and allocates it to cost objectives on the basis of total labor costs incurred.  This practice is in compliance with CAS 408.