Contributor: Anthony Walsh
The Governmental Accounting Standards Board (GASB) has issued Statement No. 101, Compensated Absences, to update the recognition, measurement and disclosure requirements for compensated absences in state and local governments. This new guidance supersedes GASB Statement No. 16, Accounting for Compensated Absences, which was issued in 1992, and aims to align the treatment of paid leave benefits for employees across different government entities.
The goal of Statement No. 101 is to provide financial statement users with improved and comparable information regarding compensated absences by establishing a unified model for recognizing and measuring compensated absences.
What Is a Compensated Absence?
A compensated absence is leave for which employees receive any combination of the following:
- Cash payments when leave is used for time off,
- Cash payment for unused leave upon termination, or
- Noncash settlement, such as a conversion to postemployment benefits.
Examples of compensated absence include vacation and sick leave, paid time off (PTO), holidays, parental leave and certain sabbatical leave.
What’s Changing for Government Accounting?
Overall, these criteria are not substantially different from the previous guidance, which required that leave be both vested and accumulated to be recognized as a liability. The term “vesting” does not appear in the new guidance, but it is similar to the first and third criteria, stating that the leave is attributable to services already rendered and that it is more likely than not to be used or paid or settled. An example of how this differs from the current methods of accounting for compensated absences comes in the form of unvested sick leave, which is not paid out upon separation.
Presently, governments do not recognize a liability for such leave time; however, the new guidance requires governments to assess how much of this leave will be used, regardless of whether that leave is paid out at separation. The second criterion, which states that the leave accumulates and carries forward to future reporting periods, is consistent with the previous definition of accumulated leave.
As a result, the new guidance does not introduce a significant change in the recognition of liabilities for compensated absences, but rather clarifies and simplifies the conditions for recognition.
Under the new model, a liability for compensated absences is recognized for two scenarios: (1) unused leave and (2) leave that has been used but not yet paid or settled. For unused leave, three criteria must be met:
- The leave is attributable to services already rendered—the employee has performed the services required to earn the leave,
- The leave accumulates and carries forward to future reporting periods—can be carried forward from reporting period when earned to a future reporting period when it will be used or otherwise paid or settled, and
- It is more likely than not to be used for time off or paid or settled through noncash means—likelihood of more than 50%.
Factors such as employment policies and historical information should be considered when assessing the likelihood of leave usage.
Employment policies can affect key factors of assessing the likelihood of leave usage by influencing employee behavior and expectations regarding leave benefits. For example, some employment policies may have a “use it or lose it” rule, which means that employees must use their leave within a certain period or forfeit it. Since this leave does not accumulate, it would not be recognized.
Other employment policies may allow employees to carry over their leave indefinitely, which may decrease the likelihood of leave usage, as employees may prefer to save their leave for future needs or cash out upon termination. Since these amounts are paid out at termination, they would need to be accrued. Employment policies can provide useful information about the incentives and constraints that affect the employees’ decisions regarding their leave.
Historical information should also be considered when assessing the likelihood of leave usage. Historical trends of employee leave usage are likely to remain consistent, barring major changes in the employment landscape. Using historical trends, employers can plan ahead for staffing needs as well as estimate the balance of the liability throughout the year.
As with most standards, there are exceptions to the above guidance:
- When leave is more likely than not to be settled through conversion to defined benefit postemployment benefits, that leave should be excluded from the liability since the liability for those benefits is already recognized in accordance with Statement No. 68, 73 or 75.
- If leave is dependent upon the occurrence of a sporadic event that affects a relatively small proportion of employees in a particular reporting period, such as parental or military leave, then it should be recognized when the leave commences. This excludes sick leave and sabbatical leave.
- Unlimited leave and holiday leave taken on a specific date should be recognized as a liability when used because those types of leave do not meet the definition of a liability. This includes “unlimited PTO” policies.
Measuring Liability
Measurement of the liability involves using the employee’s pay rate as of the financial statement date. Additionally, salary-related payments directly and incrementally associated with leave, such as payroll taxes, employer contributions to defined contribution postemployment plans should be included in the liability calculation when the leave has not been used.
When the leave has been used, such payments should be included in the pension or OPEB liability, as applicable. It should be noted that the guidance does not encourage the remeasurement or reallocation of leave which is already comprised in an entity’s accrued payroll liability at year end.
The flows assumption is another factor that can have a bearing on the likelihood of leave usage, as it determines how the leave is allocated among different types of benefits. The flows assumption refers to the order in which leave is used or paid or settled, such as first-in, first-out (FIFO), last-in, first-out (LIFO) or weighted average. For example, if the FIFO method is used, then the leave that was earned earlier is used or paid or settled first. This may affect the likelihood of leave usage, as some types of leave may have different probabilities of being used or paid or settled than others. For instance, vacation leave may be more likely to be used for time off than sick leave, which may depend on the employee’s health condition. Therefore, the flows assumption can provide useful information about the distribution and composition of the leave liability.
The GASB had included a disclosure requirement for the flows assumption used in the exposure draft of Statement No. 101, but it was removed in the final statement. The reason for this removal was that the Board concluded that disclosing the flows assumption used would not provide essential information for financial statement users, as it would not significantly affect the measurement of the liability for compensated absences.
The Board also noted that disclosing the flows assumption used could create confusion and inconsistency among governments, as different governments may use different methods or assumptions to allocate their leave. Therefore, the Board decided to eliminate this disclosure requirement and focus on other aspects of compensated absences that are more relevant and comparable for financial statement users.
The guidance also revises the disclosure requirements for compensated absences. Governments now have the option to disclose only the net annual change in the liability for compensated absences, rather than disclosing the gross annual increases and decreases separately. Additionally, the disclosure of the government funds used to settle the liability for compensated absences is no longer mandatory.
The effective date for implementing the requirements of Statement No. 101 is for fiscal years beginning after December 15, 2023, with early adoption encouraged. Governments are advised to carefully review the new guidance, compare it to their existing policies and liabilities, and plan for its implementation during the transition period to ensure compliance with the updated standards.
Do You Need Assistance with GASB 101?
Cherry Bekaert’s Government and Public Sector Accounting Advisory team provides a comprehensive GASB-as-a-Service offering that helps governments overcome staffing and technical challenges. We have a dedicated team of professionals who solely provide governmental accounting advisory services for governments, equipping them with the confidence that their needs will not be placed second to competing audit regulatory deadlines.
