"Banked vacations" refers to situations where employees can accumulate (or “bank”) all or a portion of their vacation time that they earned but did not take during the year. Typically, companies that have “banked vacation” policies allow that vacation to be taken at a later date or “cashed out” when the employee terminates. Sometimes contractors write up the vacation liability on the books to reflect employees' pay raises received subsequent to the periods in which vacation was earned.
There are a few contractors that do not limit the amount of vacation that employees can “bank”. However, most contractors that we know of have placed limitations on the amount that can be accrued or don’t allow it at all. For contactors that allow some “banking”, the most common period is one year – the employee must use accrued vacation within the next calendar year.
Contractors that have policies and procedures that provide for banked vacations, should be aware of the Government’s concerns in this area, the propriety of the method of accounting for banked vacation accruals and the reasonableness of the policy (and costs) as a component of total compensation.
A contractor normally accrues vacation liability as each employee earns vacation. It is appropriate for a contractor's books to reflect the liability that will have to eventually be paid. Therefore the contractor, for financial accounting purposes, may need to write up the vacation accruals; otherwise the accruals on the books may be understated.
If banked vacation deferrals extend beyond one year and related write-ups are significant, we recommend that contractors seek an advance agreement under FAR 31.109 to establish mutually agreeable criteria for calculating banked vacation accruals in order to reduce the potential for later issues with the auditors.