Question

Explain the conditions a company is required to accrue a liability for the following items:

1. Compensated Absences
2. Sick Leave
3. Contingent Liability
4. Asset Retirement Obligation
5. Dividends
6. Special Employee Bonuses

Answer 1

1. Compensated Absences : An employer shall book a liability for the compensated absences only if following conditions are met :

a) Payment for such absence is probable.

b) Amount of payment/obligation can be estimated reliably

c) Obligation for payment is based on the services which have already been provided by the employee

2. Sick Leave : Sick leave is also a form of compensated absence and hence the same conditions as mentioned above also follows for sick leave.

3. Contingent Liability : A contingent liability should be accrued as liability in the books of accounts only when it is probable that the liability can be reliably measured and it is probable that the future event will occur giving rise to liability.

4. Asset retirement obligation : It is basically a legal obligation associated with the removal of an asset after end of it's useful life. Hence it should be recognized only when the company is sure that expenses will be incurred at the time of retirement of asset.

5. Dividends : Liability for dividends should be accrued at the time of declaration of dividend.

6. Special Employee Bonuses : Accrual for bonuses is a little tricky since the company is required to estimate for all employees as to whether they will be able to achieve the required performance target or not and which performance target slab or what % bonus they will receive. Following conditions should be kept in mind while accruing bonus :

a) Special employee bonus should be accrued only when there is reasonable probability that the bonus will be achieved.

b) Amount of bonus can be reliably measured.