№4(15)(2013)

In this article we will try to reveal issue of necessity and order to create reserve fund to pay for vacations at enterprises

As you know, employee of company has right for annual leave with full length after one working year, which is counted from the date of signing the employment contract (Article 6 of the Law of Ukraine "On leave"). Thus, company has liabilities to an employee to provide his vacation payment in the future.

In accordance with Section 5 of RSA 11, liability is recognized if its evaluation can be reliably measured and there is possible reduction in economic benefits in the future because of its maturity. With adoption of the Decree of the Ministry of Finance of Ukraine from 25.11.2002, № 989 "On amendments to some Regulations (standards) of accounting", reserves for payment of vacation must be established in enterprises (wording from paragraph 13 of RSA 11 changed from "reserves may be created" by "reserves are created").

Moreover, according to letter from the Ministry of Finance from 09.06.2006 №31-34000-20-25/12321 on accounting methodology, it is determined that standards established by paragraph 7 of RSA 26 "Employee Benefits" and par. 13 of RSA "Liabilities", are imperative to apply by enterprise. Reserves for vacation payment are created in accounting period when occurred liability of company as result of past events, assessment of which can be determined by calculation.

Accounting

Decision to create reserves for vacation payment in companies must be displayed in order of their accounting policies. According to Section 17  of RSA 11, enterprise should use reserves only for reimbursement of expenses, to cover which they were created.

That means according to vacation reserve a company can account:

- Payment of fixed annual leave and additional leave to employees with children;

- Payment of compensation for unused vacation days;

- Payment of contributions to pension fund from amount of vacation pay and compensation.

There are no other areas of application of this reserve. So, for example, reserve does not cover payment for educational and creative holiday vacations, those are just expenses of corresponding month.

According to Section 16 of RSA 11, amount of reserve is determined by accounting estimation of resources (minus expected recoverable amount) required to settle liability at the balance sheet date. This means that

calculation of reserve amount should be carried out at each balance sheet date;

amount of reserve on the balance sheet should be equal to the sum of expected costs associated with vacation payment;

if amount of vacation reserve you created previously, does not coincide with sum of expected costs of leave, such sum of reserve must be corrected.

According to the Instruction 291, account 47 "Provision for future liabilities and charges" is provided to compile information on movement of funds, which are reserved for future expenses and payments upon decision of enterprise decision, and their inclusion in cost of current period. Accounting for movement and balance of funds for payment of vacations to employees is on subaccount 471 "Providing vacation payments". Credit of account displays provisions accrual, and debit - to use. This subaccount also summarizes information on providing mandatory contributions (taxes) on reserves of vacation payments for contributions to compulsory social insurance.

Calculation of reserve

Option 1

According to the Instruction 291, reserve amount is determined monthly as the product of actual gross wages and interest, calculated as ratio of planned annual amount to pay for vacations to overall planning of wage fund. It is this version of calculation suggested to use by MOF in a letter from 29.07.2009 № 31-34000-20-9/20640.

Amount of monthly payments to reserve is calculated as follows:

VR = Wa x (Va: WFa) x RC,

where

VR – vacation reserve;

TFP - actual wage per month;

Va - annual amount paid vacations planned in the coming year;

WFa - total planned annual wage fund;

RC - rate of Single Social Contribution charges, which, in turn, is calculated as follows:

RC = (SSC +100): 100.

Example 1

Planned annual WF of enterprise is 1500 000,00 UAH. Average number of days of annual vacation for employees is 24 days per year. Actual WF in June - 114 530,00 UAH. Single Contribution rate for company, according to class of professional risk, is 37%.

Average daily wages for company is: 1500000: 356 = 4 213.48 UAH.

Planned amount of holidays per year:

4 213,48 × 24 = 101 123.60 UAH.

Factor for calculation the reserve amount: 101 123.60 : 1 500 000.00 = 0.0674.

Amount of reserve to pay vacations in June will be:

114 530,00 × 0,0674 × 1,37 = 10 575.47 UAH.

Option 2

Procedure for determining reserve amount is set out in pp.11.10 of Instruction #69. For calculation of reserve amount under this option, the unused days of annual vacation of employees during accounting period (month in this case) is multiplied by average daily wage of employees. Average daily wages are determined according to Order #100 by dividing actual accrued wage fund on 12 calendar months preceding accounting month, by number of calendar days in that 12-month period, with exception of holidays and non-working days established by art. 73 of Labor Code. Amounts in this reserve also should include amount of charges on Single Contribution.

Example 2

Calculate vacations reserve for June, if actual WF for the previous 12 months was 1425 000.00 UAH. Average number of days of annual vacation for employees is 24 days per year. Single Contribution rate for company, according to class of professional risk - 37%.

Average daily wage is:

1425 000.00: 356 = 4 002.81 UAH.

Number of vacation days, per month:

24: 12 = 2 days.

Reserve amount:

4 002,81 × 2 × 1,37 = 10 967.70 UAH.

Difference between these two methods is that in the first case, reserve ratio is calculated once for the whole year based on planned wages indicators, and in the second case reserve is determined solely on basis of actual performance.

Records in financial statements

Value of reserve for vacation payment is displayed by enterprise in form #1 "Balance" in item "Long-term provisions"[2]. If amount of long-term payments to employees may be considered essential, such information should be listed in item "Long-term provisions of personnel costs".

Costs of reserve to pay for vacations are shown in form #2, "Income Statement" in operating costs, depending on categories of workers for whom reserve is created (administrative costs, costs of sales and other operating expenses[3]). But when directly calculating vacation amounts to employees, the sum of vacation payments is not included in operating expenses of reporting period, and is calculated at the expense of reserve made.

Notes to financial statements disclose the following information:

- Reserve balances at the beginning and end of reporting period;

- Amount that was used during reporting period;

- Amount of increase in reserve for payment of vacation during reporting period;

- Unused amount of reserve, reversed entry in reporting period.

Small business entities display reserves on vacations in Part II of liability part of "Balance" in form 1-m in line "Provision for future liabilities and targeted funding".

Adjustment of accounted reserve on vacation pay

In accordance with par. 18 of RSA 11, the rest of reserve is reviewed at each balance sheet date and, if necessary, adjusted (increased or decreased). If there is no likelihood of assets disposal to pay future liabilities, amount of such reserve is subject to reversal entries.

At the same time, according to par. 5 of RSA 11, liability is recognized if its value can be reliably measured and it is likely to decrease economic benefits due to be paid in future. If at the balance sheet date a recognized before liability is not subject to maturity, it is included in income for reporting period.

According to the Instruction #69[4], an inventory of prepaid expenses, provisions and reserves for future liabilities and charges is to verify validity of balance on these amounts at the date of inventory, compliance with approved administrative documents by enterprise manager list of generated provisions and reserves. As usual, inventory of reserves for payment of vacation is performed once a year, at the end of year.

Order of calculation is set in the Regulations #69, according to which:

R = Dvac x ADW,

Where

R - amount of reserve, UAH;

Dvac - number of days of unused vacation by employees;

ADW - average daily wage of employees, UAH/day, which is determined according to the law (Order 100[5]).

Here number of unused vacation days can be calculated in two years and reduced on amount of advanced vacations in cases where annual vacation due was partly provided in future (underworked) period. According to results of calculations it is necessary to make adjustments on calculated reserves. Given the rules of RSA 11, reducing balance of account 471 may be done through sowing income on subaccount 719 or by reversal entry.

Example

As a result of inventory an amount of over-calculated vacation reserves was shown, which is 8381.00 UAH.

If created reserve is not enough to pay for holidays, additional costs should be attributed to operating expenses in period in which they arise. In addition, be aware that debit balance does not exist on account 471, so it is prohibited to use more reserve than was calculated.

Tax Accounting

Making reserves for payment of vacation does not appear in tax accounting, but vacation pay calculated through reserve are attributed to the company's expenses taken into account in calculating object of taxation for income tax in accordance with Section 142.1 of TCU as labor costs on individuals who are employed by taxpayer.

In conclusion, we note the following:

- Creating reserve to pay for vacations is responsibility of company;

- Calculation of reserve should be reviewed at each balance sheet date;

- Amount of reserves on the balance sheet date must be equal with sum of expected costs associated with vacation pay;

- Amount of calculated reserve is included in operating costs and calculated vacation payments during reporting period are written off against created reserve and are not included in expenditures of period;

- Reserve for vacation pay is not shown in tax records.

Example to show reserve to pay for vacation in accounting and tax accounting.

Amount of reserve for vacation as of  06.01.2013 is 125000.00 UAH. In June 2013 five employees in accordance with schedule go on vacation. Amount of vacation calculated for employees in June is 22 350.00 UAH. Total charges to Single Contribution on amount of vacation payments - 88269.50 UAH (conditionally).

In June amount of reserves, estimated by accountant was 10 575.47 UAH, including vacations payment of administrative staff - 6 534.50 UAH, employees of production staff - 4 040.97 UAH.