Summary of CPEA Compensation Series: Deferred compensation arrangements
- What is the accounting entry for deferred compensation?
- What kind of account is a deferred compensation account?
- What is the accounting entry for deferred income?
- How is deferred compensation paid out?
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AI Overview
AI Overview
Accounting for deferred compensation involves recognizing an expense and a corresponding long-term liability (often “Deferred Compensation Payable”) as employees earn the benefit, typically based on the present value of future payments
. It requires accruing the obligation over the service period, commonly using a straight-line method.
Key Accounting Components
Expense Recognition: Debit “Deferred Compensation Expense” to reduce net income in the period it is earned.
Liability Recognition: Credit a “Deferred Compensation Liability” account to reflect the amount owed.
Measurement: The liability is generally recorded at the present value of future payments, using the company’s incremental borrowing rate.
Adjustments: The liability may be adjusted over time based on performance metrics or for interest accretion.
Specific Considerations
Nonqualified Deferred Compensation (NQDC): These plans are often for executives and require accrual over the vesting period.
Qualified Plans: These (e.g., 401(k)s) are simpler, often requiring only a debit to expense and credit to cash upon contribution.
Taxes: FICA/FUTA taxes are generally paid in the year of deferral, unless the amount is not yet vested.
For more details, see the OneAmerica Financial or GBQ CPAs articles.
Accounting For Deferred Compensation In The Present – GBQ
Jul 18, 2019 — An example of a nonqualified deferred compensation plan is a supplemental executive retirement plan (SERP). Accounting for it. The…
GBQ CPAs
How to Account for Deferred Compensation – wikiHow
Apr 29, 2025 — Set up the proper accounts. Whether you’re using accounting software or an old-school ledger, you’ll need to have the appropriate …
wikiHow
7.3 Accounting for deferred compensation plans – Viewpoint
Jun 15, 2024 — In certain deferred compensation arrangements, the liability is more akin to a long-term payable. For example, a deferred compensa…
PwC
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In this report, we cover the guidance related to deferred compensation arrangements. The General Subsections in FASB ASC 710-10, Compensation–General—Overall, provide guidance for employers that have deferred compensation arrangements with the following characteristics:
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The arrangement is part of an individual employment contract
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The arrangement is not, in substance, a pension plan or other postretirement benefit plan
The accounting for qualified deferred defined contribution compensation plans is fairly straightforward—debit compensation expense and credit cash upon contribution to the 401(k) or similar plan. However, the accounting behind nonqualified deferred compensation plans is more complex.