This might sound simple but it can be complex to implement. In order to accurately accrue an expense and related liability for compensated personal absences, contractors must consider and estimate, among other things, forfeitures when employees leave the company, use or lose rules, payouts for unused vacations, continuity of workforce, disciplinary termination, and severance payments. The standard allows the use of either the earned wage rates or anticipated wage rates, so long as consistency is maintained.
The term "entitlement" has a specific meaning for this standard. Entitlement means "an employees right, whether conditional or unconditional, to receive a determinable amount of compensated personal absence, or pay in lieu thereof". The standard provides clarifying comments however.
- If the employer's plan or custom provides that a new employee must complete a probationary period before the employer is liable to pay the employee for compensated personal absence, such service may be treated as creating entitlement, provided the con-tractor does so consistently.
- If the employer's plan or custom provides that entitlement is to be determined on the first calendar day or the first business day of a cost accounting period, entitlement will be considered earned in the preceding cost accounting period.
If a government auditor comes in to your facility to test your compliance with CAS 408, be prepared to provide the following:
- Written policies and procedures. If there are no written policies and procedures the auditor will evaluate the "custom" of the employer for paying compensation for personal absences
- Personal records and memorandum
- Corporate minutes relating to costs of personal absences
- Financial statements and accounts relating to compensation for personal absence
- Journal entries supporting the books of account