Do Non-Profit Organizations Need to Accrue Unused Vacation Leave?

 

Very often, we hear questions from accountants of non-profit organizations (in particular, charitable foundations, public organizations) about whether such organizations need to create a provision for unused vacation days. After all, most of them do not form the cost of goods/services, the uniform allocation of labor costs, including vacation pay, to which is one of the tasks of creating such a provision.

What requirements does our legislation impose on non-profit organizations that prepare their financial statements in accordance with National Accounting Standards (NAS)?

As a general rule, our accounting standards oblige enterprises to recognize as liabilities payments for unworked time that are subject to accumulation. Such liabilities are recognized by creating a provision in the relevant period to reimburse future expenses, in particular, for employee vacation pay (this is stated in paragraph 13 of P(S)BO 11 "Liabilities" and paragraph 7 of P(S)BO 26 "Employee Benefits").

At the same time, there are certain exceptions. Thus, according to paragraph 8 of Section I of P(S)BO 25 "Financial Report of a Small Business Entity," two types of small business entities (hereinafter referred to as SBEs) have the right not to accrue the mentioned provision, but to recognize vacation pay expenses in the period of their actual accrual, namely:

• legal entities – single tax payers who meet the criteria established in sub-paragraph 3 of paragraph 291.4 of Article 291 of the Tax Code of Ukraine and maintain simplified accounting of income and expenses in accordance with tax legislation;
• legal entities that meet the criteria for micro-enterprises.

Public and charitable organizations are not single tax payers, as they have non-profit status. Thus, they cannot be classified as the first type of SBEs that are exempt from the obligation to accrue vacation provisions.

How to determine if a non-profit organization belongs to the second type of SBE?

For the purpose of preparing financial statements for 2017 and earlier periods, enterprises and organizations used the criteria established by Article 55 of the Commercial Code of Ukraine. In particular, micro-enterprises included enterprises of any form of ownership and organizational and legal form, where the average number of employees per year did not exceed 10 people, and the income for the same period from all types of activities did not exceed 2 million euros (at the average annual NBU exchange rate).

Starting from 2018, when determining whether your organization meets the criteria for micro-enterprises, you should be guided by the classification of enterprises that was added to the Law on Accounting and Financial Reporting (changes introduced by Law No. 2164-VIII dated 05.10.2017).

According to paragraph 2 of Article 2 of the aforementioned Law, enterprises and organizations whose indicators as of the date of preparation of the annual financial statements for the year preceding the reporting year meet at least two of the following criteria may be classified as micro-enterprises:

• average number of employees not more than 10 people;
• assets have a balance sheet value of not more than 350 thousand euros;
• net income from the sale of goods and services does not exceed 700 thousand euros.

National legislation does not provide for other separate exceptions, benefits, or additional requirements regarding the creation of provisions, including for unused vacation days, for non-profit organizations.

Therefore, if your organization meets the criteria for micro-enterprises, you have the right to include a provision in your accounting policy order regarding the application of the right to exceptions provided for in paragraph 8 of Section I of P(S)BO 25, and not to create a provision for unused vacation days.

What to do if a non-profit organization does not meet the criteria for micro-enterprises?

In all other cases, public organizations, charitable foundations, and other non-profit organizations must be guided by general requirements and reflect provisions for accumulated vacation days in their accounting and financial statements.

The obligation to accrue vacation provisions also applies to organizations that prepare their financial statements in accordance with International Financial Reporting Standards. This requirement is contained in IAS 37 "Provisions, Contingent Liabilities and Contingent Assets".

So, if you have not created a provision before, now is the time to correct it. Therefore, when conducting an inventory, do not forget to plan as one of the stages the inventory of unused vacation days for each employee and the amount of the provision. When determining the amount of the provision as of the end of the year, it will be necessary to calculate the sum of the products of the remaining accumulated vacation days and the average daily salary for each employee (including the amounts of ESV accruals).

If you have practical questions regarding the calculation or reflection in accounting and financial statements of operations for creating provisions for unused vacation days, specialists at UHY Prostir will be happy to help and provide clear and reasoned answers.

We also suggest you consider our page on conducting audits of non-profit organizations.