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a. Problem. A contractor has a program whereby an employee on reaching a
certain level within the management structure becomes entitled to a 3-month
sabbatical vacation with pay on completion of five years of service. No entitlement to
the sabbatical vests in the employee until it is actually taken. If the employee were to
be terminated prior to the completion of five years, she or he would not be paid. The
contractor becomes subject to CAS 408 and wishes to accrue the cost of the
sabbatical vacation ratably over the 5-year eligibility period.
Solution. This contractor may not accrue the cost of the sabbatical vacation
since its present policy does not meet the criteria for accrual required by CAS 408-50
(b)(1). Under this provision, entitlement is recognized on the accrual basis in the same
cost accounting period in which the employer becomes liable to pay compensation in
the event of layoff (vested). However, under this contractor's policy, the employee
would not be paid if terminated prior to the completion of 5 years. In this case, the
contractor would be subject to the provisions of CAS 408-50(b)(3) which require that
when no liability exists for the payment of unused entitlement on layoff, the cost of the
compensated personal absence is to be recorded in the cost accounting period in
which the leave is taken and/or paid. If the contractor changed its present policy to
provide for a pro rata vesting (that is, payment on a pro rata basis in the event of
termination) over the 5-year eligibility period, then the accrual for the sabbatical
vacation would be acceptable.
b. Problem. The contractor has a vacation plan which provides that an
employee who has been employed at least one year at December 31 becomes entitled
to 80 hours of vacation, starting no earlier than the following May 1, provided the
individual is still employed at that time. If the employee were to be laid off prior to May
1, 1988, he or she would be paid on May 1, 1988 for the vacation earned as of
December 31, 1987. If the employee were still in layoff status as of May 1, 1989, she
or he would then be paid for any vacation earned between January 1, 1988 and the
date of layoff. However, if the employee were to quit voluntarily before May 1, 1988,
he or she would forfeit the right to vacation pay. The contractor's fiscal year ends
March 31, 1988 under CAS 408 to reflect its liability for vacation pay.
Solution. CAS 408-40(a) requires that the cost of vacation pay be assigned to
the cost accounting period or periods in which the entitlement was earned. In this
case, vacation was earned during the annual period ending on December 31, 1987.
Although retention on the payroll or reemployment status is required to actually receive
the vacation at May 1, 1988, the estimated vacation liability amount has already been
determined by the preceding December 31. In addition, CAS 408-50(b)(1) establishes
the liability to be recognized as that amount of vacation pay which would be payable on
layoff, even though some employees may voluntarily terminate and forfeit their
entitlement. Therefore, the contractor, in determining its liability at March 31, 1988,
should include both the amount earned for service between April 1, 1987 and
December 31, 1987, and the amount earned for service between January 1, 1988 and
March 31, 1988. This liability should be reduced for anticipated forfeitures, if material,
as required by CAS 408-50(c)(2). It should be noted that in the fiscal year ended
March 31, 1987, if this was the contractor's initial compliance with the standard, the