According to GAAP, how should an employer treat nonvested vacation leave expected to vest?

The correct treatment of nonvested vacation leave under Generally Accepted Accounting Principles (GAAP) is to accrue it. This is because the employer has an obligation to pay employees for earned vacation time, even if it is nonvested.

When vacation leave is earned, it represents a future payment to the employee for services rendered. If there is a reasonable expectation that the leave will vest and the employees will be entitled to that pay, it creates a liability for the employer that needs to be reported in the financial statements. Accrual accounting requires that expenses and liabilities be recognized when they are incurred, not necessarily when they are paid out. Thus, recognizing nonvested vacation leave as an accrued liability provides a more accurate representation of the employer's obligations and expenses.

This approach aligns with the accrual basis of accounting, which underscores the importance of recognizing expenses in the period they are incurred rather than when cash changes hands.