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ASC 710 Compensation—General
Perspective and Issues
Subtopics
ASC 710, Compensation-General, contains one subtopic:
ASC 710-10, Overall, which is divided into two subsections:
- General, which provides guidance on compensated absences, deferred compensation, and lump-sum payments under union contract
- Deferred Compensation—Rabbi Trusts.
Scope and Scope Exceptions
ASC 710 applies to all entities, but as listed in 710-10-15-5, it does not apply to the following transactions:
- Benefits paid to active employees other than compensated absences
- Benefits paid at retirement or provided through a pension or postretirement benefit plan including special or contractual termination benefits payable upon termination from a pension or other postretirement plan are covered by Subtopics 715-30 and 715-60
- Individual deferred compensation contracts that are addressed by Subtopics 715-30 and 715-60, if those contracts, taken together, are equivalent to a defined benefit pension plan or a defined benefit other postretirement benefit plan, respectively
- Special or contractual termination benefits that are not payable from a pension or other postretirement plan are covered by Topic 712
- Stock compensation plans that are addressed by Topic 718
- Other postemployment benefits (see Topic 712) that do not meet the conditions in paragraph 710-10-25-1 and are accounted for in accordance with Topic 450.
In addition, the Deferred Compensation—Rabbi Trusts Subsection does not address the accounting for stock appreciation rights even if they are funded through a rabbi trust. (ASC 710-10-15-8)
Definitions of Terms
Compensated Absences. Employee absences, such as vacation, illness, and holidays, for which it is expected that employees will be paid.
Full Eligibility Date. The date at which an employee has rendered all of the service necessary to have earned the right to receive all of the benefits expected to be received by that employee (including any beneficiaries and dependents expected to receive benefits). Determination of the full eligibility date is affected by plan terms that provide incremental benefits expected to be received by or on behalf of an employee for additional years of service, unless those incremental benefits are trivial. Determination of the full eligibility date is not affected by plan terms that define when benefit payments commence or by an employee's current marital or dependency status.
Rabbi Trusts. Rabbi trusts are grantor trusts generally set up to fund compensation for a select group of management or highly paid executives. To qualify as a rabbi trust for income tax purposes, the terms of the trust agreement must explicitly state that the assets of the trust are available to satisfy the claims of general creditors in the event of bankruptcy of the employer.
Sabbatical Leave. A benefit in the form of a compensated absence whereby the employee is entitled to paid time off after working for an entity for a specified period of time. During the sabbatical, the individual continues to be a compensated employee and is not required to perform any duties for the entity.
Concepts, Rules, and Examples
Compensated Absences
Compensated absences refer to paid vacation, paid holidays, paid sick leave, and other paid leaves of absence. ASC 710 requires an employer to accrue a liability for employee's compensation for future absences if all of the following conditions are met:
- The employee's right to receive compensation for future absences is attributable to employee services already rendered.
- The right vests or accumulates.
- Payment of the compensation is probable.
- The amount of the payment can be reasonably estimated.
(ASC 710-10-25-1)
Vesting
If an employer is required to compensate an employee for unused vacation, holidays, or sick days even if employment is terminated, then the employee's right to this compensation is said to vest. Accrual of a liability for nonvesting rights depends on whether the unused rights either expire at the end of the year in which they are earned (often referred to as a “use it or lose it” policy) or accumulate and are carried forward to succeeding years. If the rights expire, a liability for future absences is not accrued at year-end because the benefits to be paid in subsequent years would not be attributable to employee services rendered in prior years. If all or a portion of the unused rights accumulate and increase the benefits otherwise available in subsequent years, a liability is accrued at year-end to the extent that it is probable that employees will be paid in subsequent years for the increased benefits attributable to the accumulated rights and the amount can be reasonably estimated. (ASC 710-10-25-2)
Sick Pay
ASC 710-10-25-7 allows an exception for employee paid sick days that accumulate but do not vest. No accrued liability is required for sick days that only accumulate. However, an employer is permitted to accrue these benefits if the four conditions are met. FASB believed that these amounts are rarely material and the low reliability of estimates of future illness coupled with the high cost of developing these estimates indicates that accrual is not necessary. The required accounting is to be determined by the employer's actual administration of sick pay benefits. If the employer routinely lets employees take time off when they are not ill and allows that time to be charged as sick pay, then an accrual is required. (ASC 710-10-25-6)
Other Types of Paid Time Off
Pay for other employee leaves of absence that represent time off for past services (jury duty, personal days) are considered compensation subject to accrual. Pay for employee leaves of absence that will provide future benefits and that are not attributable to past services rendered are not subject to accrual.
ASC 710-10-25-4 and 5 govern the accounting for sabbatical leaves or other similar benefit arrangements that require the completion of a minimum service period, and for which the benefit does not increase with additional years of service. Under these arrangements, the individual continues to be a compensated employee and is not required to perform duties for the entity during their absence. Assuming the four conditions set forth above are met, the compensation cost associated with a sabbatical or other similar arrangement must be ratably accrued over the pre-sabbatical periods of service.
Bonus Payments
Bonus payments may require estimation since the amount of the bonus may be affected by the entity's net income for the year, by the income taxes currently payable, or by other factors. Additional estimation is necessary if bonus payments are accrued on a monthly basis for purposes of interim financial reporting but are determinable only annually by using a formula whose values are uncertain until shortly before payment.
Deferred Compensation Contracts
If the aggregate deferred compensation contracts with individual employees are equivalent to a pension plan, the contracts are accounted for according to ASC 715-30. All other deferred compensation contracts are accounted for according to ASC 710.
ASC 715-60 states that the terms of the individual contract will govern the accrual of the employee's obligation for deferred compensation and the cost is to be attributed over the employee service period until full eligibility is attained.
Per ASC 710, the amount to be accrued is not to be less than the present value of the estimated payments to be made. This estimated amount is accrued in a systematic and rational manner. When elements of both current and future employment are present, only the portion attributable to the current services is accrued. (ASC 710-10-25-9) All requirements of the contract, such as continued employment for a specified period, availability for consulting services, and agreements not to compete after retirement, need to be met in order for the employee to receive future payments. Finally, the total amount is amortized to expense over the period from the date the contract is signed to the point when the employee is fully eligible to receive the deferred payments.
One benefit that may be found in a deferred compensation contract is for periodic payments to employees or their beneficiaries for life, with provisions for a minimum lump-sum settlement in the event of early death of one or all of the beneficiaries. The estimated amount to be accrued is based on the life expectancy of each individual concerned or on the estimated cost of an annuity contract, not on the minimum amount payable in the event of early death. (ASC 710-10-25-11)
Note that all of the foregoing entries assume that Clear Eye Corporation chooses to record the full (i.e., nondiscounted) amount of the estimated future liability pro rata each year. It would also have been acceptable under ASC 710 to record the discounted present value amounts. In that case, while the charge for deferred compensation would have been lower in the earlier years, the accrued amounts would have to be further accreted to reflect interest on the obligation, so the overall charge over the four-year accrual for the lump-sum payment would have still equaled $280,000. The charge for the lifetime annuity over the four years until the payments commence would have been less than the estimated $392,000 obligation, since the amount recorded as of the inception of the annuity (i.e., retirement date) would be the present value of the future estimated payments.
Deferred Compensation—Rabbi Trusts
The chart below gives an overview of the guidance for rabbi trusts.
| Trust | Description | Accounting |
| Plan A | Does not permit diversification. Must be settled by delivery of a fixed number of shares of employer stock. |
Classify stock held by trust in equity, similar to treasury stock. |
| Plan B | Does not permit diversification. May be settled by delivery of cash or shares of employer stock. |
Classify employee stock in equity in a manner similar to treasury stock. Classify deferred compensation obligation as a liability. |
| Plan C | Permits diversification, however, the employee has not diversified. | |
| Plan D | Permits diversification, and the employee has diversified. | Assets accounted for in accordance with GAAP for the particular assets. The allocation is classified as a liability. |