Paid Time Off (PTO) / Vacation — Accrual as Earned and Liability for Unused Balances

💡 Accountant's Note

Under ASC 710-10 (Compensated Absences): vacation/PTO must be accrued if: (1) the employee's right to the absence is attributable to services already rendered, (2) the right vests (accumulated vacation is paid out upon termination) or accumulates (carries forward), (3) payment is probable, and (4) the amount can be estimated. For vacation that vests (most US states require payout of accrued vacation at termination — California, Colorado, North Dakota treat accrued vacation as wages that cannot be forfeited): accrue as earned. The liability = total accrued vacation hours × current pay rate. As pay rates increase, the liability must be remeasured at the NEW rate (the cost of a vacation day increases as the employee's salary increases). 'Use-it-or-lose-it' policies: if the employer can legally forfeit unused vacation (allowed in most states except California): vacation that expires without being taken is derecognized from the liability (reversed into expense reduction). Unlimited PTO policies: no accrual is possible — the unlimited amount cannot be estimated, and there is typically no vested right to unused days upon termination.