Companies are required to record compensated absences (like vacations and sick days) on the books as liabilities. Several potential accounting issues can stem from recording these liabilities. One of these issues is they must be recorded in the period in which they are earned, which would be the current accounting period. However, vacations are typically not allowed to be taken until the next accounting period (after an employee has been in the company for one year) and the employee has received a raise since then. Based on this fact, the liability is accrued using the hiring rate but taken after a raise has been granted, leaving a difference between the liability and the expense.

Do you think that GAAP should be adjusted so that vacations are not recorded until they are taken? Why or why not?

Why do you think vacations are typically not allowed to be taken until an employee has completed one year in the company?