A little more on this
Posted By: accrual method of accounting: on 2009-09-08
In Reply to: Sounds like a lawsuit to me. - Tell you what to find out...
By way of explanation, there are two ways businesses can report their income and expenses - the accrual method and the cash method.
With the cash method, you report income when it is received (not when it is earned) and expenses when they are paid (not when the obligation is incurred).
With the accrual method, it's just the opposite. You report income when you earn it (not when it is paid) and you report expenses when they are incurred (not when the bill is actually paid).
Very few businesses are eligible to use the cash method of accounting - mostly tiny mom&pop types of operations.
In reporting these revenues and expenses on the accrual basis, you do so at whatever their valuation is at that time. Earned PTO is a current wage expense during the accounting period, and becomes a company liability (Accumulated PTO).
The expense is used like other expenses to offset income for purposes of determining gross profits before taxes (and therefore figure into determining what taxes are paid).
A downward adjustment in the valuation of this expense prior to it being paid will mean that the company has overreported expenses and therefore has underreported its net profit...meaning that it will not have paid its taxes on that unrecognized profit.
This is nice work if you can get it! You report $1 million in expenses but then later (when it comes time to pay them) you unilaterally decide that you're going to reduce them to $500,000. You just got away with $500,000 in unreported profit!
Understandably, the government takes a dim view of such shenanigans.
With respect to the DOL, there's a whole different ballgame in play there - you don't mess with the valuation of people's accumulated benefits.
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