Advanced Accounting · AS 15 Employee Benefits

AS 15 Short-term Employee Benefits and Compensated Absences

Updated 4 October 2026 · Fact-checked

Short-term employee benefits fall due wholly within twelve months after the end of the period in which employees render the service. Under AS 15 you recognise the undiscounted amount as an expense and a liability. For accumulating leave, you accrue the expected extra payment at the balance sheet date. For non-accumulating leave, you recognise nothing until the absence occurs.

Understand Short-term Employee Benefits and Compensated Absences

Short-term employee benefits are benefits, other than termination benefits, that are due to be settled wholly within twelve months after the end of the period in which the employees render the related service. Examples are wages, salaries, social security contributions, paid annual leave, paid sick leave, profit sharing, bonuses and non-monetary benefits such as medical care, housing and cars for current employees.

The accounting is simple because there is no actuarial work. You do not discount the amounts. When an employee has rendered service, you recognise the undiscounted amount expected to be paid as an expense (unless another standard allows it to be included in the cost of an asset). If the amount is unpaid at the balance sheet date, show it as a liability (accrued expense). If you have paid more than is due, recognise the excess as a prepaid asset only to the extent that the prepayment will lead to a reduction in future payments or a cash refund.

Compensated absences are paid leave. They are of two types. Accumulating absences can be carried forward and used in future periods. They may be vesting (the employee is paid cash for unused leave on leaving) or non-vesting (no cash on leaving). Non-accumulating absences do not carry forward: they lapse if unused. They carry no entitlement to cash for unused leave when the employee leaves. The accounting consequence is that no liability is recognised in advance. Maternity leave is a typical non-accumulating absence. Paid sick leave can be accumulating or non-accumulating, depending on the entity's policy.

For accumulating absences, the employer's obligation arises as the service is rendered, because that service increases the entitlement to future paid absence. So you recognise the expected cost at the balance sheet date. Measure it as the additional amount you expect to pay because of the unused entitlement that has accumulated. For non-vesting leave, the possibility that the employee leaves before using it is reflected in the measurement. For non-accumulating leave, the obligation arises only when the absence takes place, so you recognise nothing in advance.

For profit sharing and bonus plans, recognise the expected cost only when the entity has a present legal or constructive obligation to make the payment as a result of past events, and a reliable estimate can be made. A present obligation exists only when the entity has no realistic alternative but to make the payments. If the plan makes payment depend on employees staying, estimate the cost after allowing for the employees expected to leave.

Key rules to remember

Short-term benefit recognition: Expense and liability = undiscounted amount expected to be paid for service rendered; No discounting and no actuarial valuation for short-term benefits.
Accumulating compensated absence (accrual): Liability = additional amount the entity expects to pay as a result of the unused entitlement accumulated at the balance sheet date; Use the daily pay rate given in the question, which is the rate expected to apply when the leave is taken or paid. Do not discount.
Unused leave entitlement: Additional amount = days expected to be taken or paid because of the accumulated unused leave × daily rate; Follow the order of use the question states. In the usual convention, leave is taken first from the current year's entitlement and then from the balance carried forward. For vesting leave, the liability is the undiscounted amount payable on the unused entitlement, with no adjustment for leavers.
Non-accumulating absence: Recognise expense only when the absence occurs; Salary paid for the period already covers it, so no extra accrual.
Profit sharing and bonus: Recognise when: present obligation exists AND reliable estimate possible; This is a recognition test, not a fixed formula. Where the plan makes payment depend on employees staying, estimate the expected cost after allowing for the employees expected to leave. Follow the plan terms given in the question.

How to solve Short-term Employee Benefits and Compensated Absences questions

Use this method for any question on short-term benefits or leave.

1Identify the benefit type: salary, paid leave, profit share or bonus. Check it is due within twelve months of the period end.
2For leave, decide whether it is accumulating or non-accumulating, and whether vesting or non-vesting.
3If non-accumulating, recognise no liability for unused leave. Say that the expense is recognised when the absence occurs.
4If accumulating, find the unused days at the balance sheet date. For non-vesting leave, count how many of them the entity expects to be used in addition to the next year's own entitlement. For vesting leave, accrue all unused days, because the employee is paid cash for them whether or not they are used.
5Apply the correct rate (usually the current salary per day or as stated) and compute the undiscounted amount. Allow for expected leavers if the question gives it and the leave is non-vesting. For vesting leave, make no adjustment for leavers.
6For bonus or profit sharing, confirm there is a present obligation and a reliable estimate, then compute the amount, allowing for expected leavers where the plan makes payment depend on staying.
7Give the journal entry or the amount shown as expense and as liability, and state the AS 15 reason in one line.

Quickest way: Fast route for MCQs and written answers

When to use it: Use when you have little time and the question gives leave days, salary rates and expected usage.

Ask: does the leave carry forward? If no, the answer is nil accrual for unused leave. This clears many MCQs quickly.
If yes, check whether it is vesting. For non-vesting leave, ignore days the employee will use out of the next year's own entitlement and count only the extra days expected to be taken beyond it. For vesting leave, do not use this shortcut: accrue all unused days at the daily rate, undiscounted, with no adjustment for leavers.
Multiply days by the daily rate. Do not discount.
For MCQs, eliminate options that discount the amount. For non-vesting leave, also eliminate options that accrue all unused days when the question says only some will be used.
For written answers, use this format: classification, treatment as per AS 15, working in a small table, then conclusion with the amount. Step marks go to the classification and the working.

Common mistakes in Short-term Employee Benefits and Compensated Absences

Accruing a liability for non-accumulating leave that is unused at year end.
Students think any unpaid leave is an obligation.
Fix: Remember that non-accumulating leave lapses. The obligation arises only when the absence occurs, so nothing is accrued in advance.
Discounting short-term benefit liabilities to present value.
Students carry over the defined benefit method.
Fix: Short-term benefits are measured at the undiscounted amount. No actuarial method applies.
Accruing all unused accumulating leave days instead of only the expected additional payment.
Students do not separate days covered by the next year's entitlement.
Fix: Accrue only the extra amount expected to be paid because of the accumulated entitlement, using the expected usage given in the question.
Ignoring expected leavers when measuring bonus or non-vesting leave.
Students read the headcount and skip the stated percentage.
Fix: Allow for expected leavers where the leave is non-vesting or the plan makes the bonus depend on staying. For vesting leave payable in cash on leaving, no reduction for leavers applies.
Recognising a bonus just because management intends to pay it.
Students confuse intention with obligation.
Fix: Recognise only if there is a present legal or constructive obligation and a reliable estimate exists.

Worked examples

Example 1

An entity has 100 employees, each entitled to 6 days of paid sick leave a year. Unused sick leave lapses at year end and is not paid on leaving. At 31 March the unused leave is 100 days in total. Average daily wage is ₹1,000. What liability is recognised for unused sick leave?

Show the solution

The sick leave does not carry forward and is not paid when unused, so it is non-accumulating.
Under AS 15, an obligation arises only when the absence occurs.
Salary for the year already includes pay for days taken, so no extra expense arises.
Unused days (100 × ₹1,000 = ₹1,00,000) are not accrued because they lapse.

Answer: Nil liability. The cost of sick leave is recognised when the absence takes place.

Example 2

An entity allows 5 days of paid leave per employee per year. Unused leave carries forward for one year only and is not paid in cash on leaving. Leave is taken first from the current year's entitlement and then from the carried balance. At 31 March 2027 there are 40 employees. Each has 2 unused days. The entity expects that 30 employees will use their own 5 days next year plus all 2 carried days, and the other 10 will use only their own 5 days. No employees are expected to leave during the year. Daily wage is ₹1,500. Compute the liability.

Show the solution

The leave is accumulating and non-vesting.
No employees are expected to leave, so no reduction is needed for leavers.
Leave is taken first from next year's own 5 days, then from the carried balance. So carried days are used only by employees who take more than 5 days.
Given: employees expected to take 7 days (5 own days + 2 carried days): 30.
Extra days expected to be taken beyond next year's own entitlement: 30 × 2 = 60 days.
The other 10 employees will not use the carried leave, so no accrual for them.
Liability = 60 × ₹1,500 = ₹90,000, undiscounted.

Answer: Recognise an expense and liability of ₹90,000 for accumulated compensated absences at 31 March 2027.

Exam tips

Always start your answer by classifying the leave as accumulating or non-accumulating, vesting or non-vesting. Examiners award marks for this.
Read the expected usage carefully. The question usually tells you how many employees will use carried leave. Accrue only that.
Show the working in a small table with days, rate and amount. Step marks are given even if the final figure is off.
In theory questions, define short-term benefits, state the no-discount rule and give one example each of accumulating and non-accumulating leave.
For bonus questions, state the two recognition conditions, a present obligation and a reliable estimate, before computing.

Practice questions from AS 15 Employee Benefits

Short-term Employee Benefits and Compensated Absences in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Short-term Employee Benefits and Compensated Absences: frequently asked questions

What is the difference between accumulating and non-accumulating compensated absences?

Accumulating absences carry forward and can be used in later periods, so you accrue the expected cost at the balance sheet date. Non-accumulating absences lapse if unused, so you recognise cost only when the absence occurs.

Do I discount short-term employee benefits under AS 15?

No. Short-term benefits are measured at the undiscounted amount expected to be paid. Discounting and actuarial valuation apply to long-term and post-employment defined benefit items.

How do I calculate leave encashment liability for accumulating leave?

Find the unused days at the balance sheet date. For non-vesting leave, accrue the additional amount expected to be paid because of the accumulated entitlement, using the days expected to be used beyond the next year's own entitlement at the expected daily rate. For vesting leave, the liability is the undiscounted amount payable on the unused entitlement, with no adjustment for leavers.

When is a bonus or profit-sharing payment recognised?

Recognise it when the entity has a present legal or constructive obligation from past events and can make a reliable estimate. Where the plan makes payment depend on staying, estimate the cost after allowing for the employees expected to leave.