GAAP: Employee benefits

How to account for employee benefits under the new standard.

Current accounting treatment

Disclosure of ‘employee benefits’ is not covered by a current UK standard. Companies Act 2006, section 411 requires certain information regarding staff numbers and costs, though this disclosure is NOT required of entities within the small companies’ regime.

The costs to be disclosed are wages and salaries paid or payable, social security costs incurred and other pension costs incurred. There is no explicit guidance in UK GAAP relating to other employee benefits, such as paid annual leave or paid sick leave. (Though it is mentioned obliquely in paragraph 11(b) of FRS 12.)

Accounting treatment under FRS 102

Section 28 of the standard deals with employee benefits, defined as ‘all forms of consideration given by an entity in exchange for service rendered by employees, including directors and management’. The cost of accumulating compensated absences is required to be measured and recognised in the financial statements. Therefore an entity that has employees that have untaken holidays at the balance sheet date that will be paid for in the next financial year will need to make an accrual for such entitlements. 

Reporting and commercial impact of the changes

The main impact on financial reporting, which will only impact on those entities that did not previously include an accrual for holiday pay, will be increased employee costs hitting the profit or loss (statement of income) and therefore affecting the results of the entity and reducing its distributable profits. It is difficult to gauge how material the effect could be, and will of course vary depending on the number of employees, the size of their holiday entitlement and the timing of the entity’s year end in relation to the holiday season. Additionally there will be an increase in creditors due within one year; this is where the standard stipulates that the entity shall present the amount accumulated at the year end.

The calculation of accumulating compensated absences represents additional work for the entity, as there was no previous requirement to disclose this information, so most entities would not formerly have collated the information. However, an advantage to this is that there will be a more uniform approach to this issue going forward, meaning that accounts will be more comparable in future. ‘Old’ GAAP was fairly unclear, so previously some entities did provide for accrued holiday pay and some didn’t; and for those that did, many differing methods may have been used.


The transition section of the standard is silent on the treatment of employee benefits and accordingly the general transitional procedures in FRS 102 will apply on first-time adoption, ie assets and liabilities will be recognised, reclassified and measured as at the transition date in accordance with FRS 102 (resulting in an accrual for untaken holiday pay to be included as at that date). 

Taxation impact of the changes

The changes will have a minimal effect for corporation tax purposes. A likely scenario for those companies who have not previously accrued for holiday entitlement at the year-end is that their staff costs will increase in the year of transition, leading to a reduction in its corporation tax liability for the transitional year. 

Corporation Tax 2009, s1288 requires that any employee’s remuneration, including directors’ bonuses, accrued for in the accounts will be disallowed for corporation tax purposes unless paid within nine months of the year-end. Similar provisions exist for unincorporated businesses at Income Tax (Trading and Other Income) Act 2005, s36.