Employees may be entitled to be paid during certain absences, such as annual recreational leave or short periods of illness. Some entities also offer other forms of paid leave, including maternity leave, parental leave, carers’ leave and bereavement leave. Entitlements to short-term paid absences are those entitlements that are expected to be settled within 12 months after the end of the reporting period.
Short-term paid absences may be either accumulating or non-accumulating. Non-accumulating paid absences are leave entitlements that the employee may not carry forward to a future period. For example, an employment agreement may provide for 5 days of paid, non-cumulative sick leave. If the employee does not take sick leave during the year, the unused leave lapses; that is, it does not carry forward to an increased entitlement in the following year.
Accumulating paid absences are leave entitlements that the employee may carry forward to a future period if unused in the current period. For example, an employment agreement may provide for 20 days of paid annual leave. If the employee only takes 15 days of annual leave during the year, the remaining 5 days may be carried forward and taken in the following year.
Accumulating paid absences may be vesting or non-vesting. If accumulating paid absences are vesting, the employee is entitled, upon termination of employment, to cash settlement for unused leave. If accumulating paid absences are non-vesting, the employee has no entitlement to cash settlement of unused leave. For example, an employment contract may provide for cumulative annual leave of 20 days, vesting to a maximum of 30 days, and non-vesting cumulative sick leave of 10 days per annum.
After 2 years of service, the employee would have been entitled to take 40 days of annual leave and 20 days of sick leave, but if the employee resigned after 2 years of employment, during which no annual leave or sick leave had been taken, the termination settlement would include payment for 30 days’ unused annual leave (the maximum allowed by the employment agreement). There would be no cash settlement of the unused sick leave because it was non-vesting.
Paragraph 13 of IAS 19 requires expected short-term accumulating paid absences to be recognized when the employee renders services that increase the entitlement. For example, if its employees are entitled to 2 weeks of cumulative sick leave for every year of service, the entity is required to accrue the sick leave throughout the year. The employee benefit; that is, the accumulated leave, is measured as the amount that the entity expects to pay to settle the amount that has accumulated at the end of the reporting period. If the leave is cumulative but non-vesting, it is possible that there will not be a future settlement.
The sick leave might remain unused when the employment contract is terminated. However, the sick leave must still be accrued throughout the period of employment because an obligation arises when the employee provides services that give rise to the leave entitlement. If the leave is non-vesting, it is necessary to estimate the amount of accumulated paid absence that the entity expects to pay.
For non-accumulating short-term paid absences, paragraph 13 requires the entity to recognize the employee benefit when the paid absence occurs. A liability is not recognized for unused non-accumulating leave entitlements because the employee is not entitled to carry them forward to a future period. The alternative forms of short-term paid absences and the corresponding recognition and measurement requirements will be depicted soon.