Breaking it down
On June 16, 2022, the GASB issued GASB Statement No. 101, “Compensated Absences,” to enhance the recognition and measurement guidance for compensated absences and to refine the related financial statement disclosures.
Basics of the GASB statement
The GASB statement amends the definition of a compensated absence to encompass the various types of benefits offered by governmental employers and establishes a unified model for accounting and reporting. The statement also revises the related financial statement disclosure requirements, including eliminating certain disclosures previously required that GASB research found did not provide essential information to financial statement users. The GASB statement applies to all units of state and local government.
What types of compensated absences are affected?
The GASB statement supersedes the previous definition of a compensated absence to include leave for which employees may receive one or more of the following:
- Cash payments for leave employees use for time off
- Other cash payments, such as payment for unused leave upon termination of employment
- Noncash settlements, such as conversion of accrued leave to defined benefit postemployment benefits
Termination of employment is defined in the statement as the end of the employee’s active service, which includes voluntary or involuntary resignation or retirement. The statement does not apply to termination benefits, which are accounted for in separate GASB guidance. Specific examples of compensated absences within the scope of the guidance include:
- Vacation leave
- Sick leave
- Paid time off (PTO)
- Holidays
- Parental leave
- Bereavement leave
- Certain types of sabbatical leave
Finally, the GASB statement also establishes accounting and reporting requirements for certain salary-related payments associated with providing leave, such as those related to defined contribution pensions, defined contribution other postemployment benefits (OPEB), and sabbatical leave, for which U.S. GAAP previously provided only limited guidance.
How are compensated absences accounted for under the new model?
The GASB statement requires that a compensated absence be recognized in financial statements prepared using the economic resources measurement focus when three criteria are met:
- The leave accumulates into a future reporting period.
- The leave is attributable to services already rendered by the employee.
- The leave is more likely than not (a likelihood of more than 50%) to be used for time off or otherwise paid in cash or settled through noncash means.
The GASB provides guidance on what factors entities should assess to evaluate whether settlement is more likely than not to occur. These factors include employment policies; whether earned leave is or will be become eligible for use or payment; historical information about the use, payment, or forfeiture of compensated absences; or other information that would affect the estimate, such as situations where historical information is not indicative of future trends or patterns. Entities also should consider vesting, although it is not a separate criterion for recognition (with nonvesting leave meeting the definition of a liability as the entity has an obligation for the portion that will be used as paid leave). For purposes of this pronouncement, the GASB specifically calls out how vesting (defined as leave the employee is entitled to receive payment or settlement for but has not otherwise used) can be considered in the analysis as to whether leave is more likely than not to be used or otherwise paid or settled.
Certain types of compensated absences are not recognized until the leave commences or is used. Parental leave, military leave, and jury duty are dependent upon the occurrence of a sporadic event that affects a relatively small proportion of employees within a particular reporting period and therefore should not be recognized as liabilities until the leave commences. Unlimited leave (such as unlimited PTO) and holiday leave that is taken on a specific date (as opposed to floating holidays that employees use at their discretion) should not be recognized as a liability until the leave is used.
Leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be recognized as a liability for compensated absences.
The actual calculation of the liability is defined in the GASB statement as accumulated leave (often in hours) multiplied by the employee’s rate of pay as of the date of the financial statements, and it would include certain salary-related payments. Any change in pay rate in future periods would be recognized in the period of change. An exception to this calculation is included for instances where the entity is aware that portions of the settlement will be paid at a different rate. When that different rate is known to the entity at the current financial reporting date, that different rate is used as of the date of the financial statements.
What are salary-related payments and sabbatical leave as defined in the new model?
The GASB statement defines a salary-related payment as an obligation that an entity incurs related to providing leave in exchange for services rendered, such as an employer’s share of Social Security taxes or Medicare taxes. These should be included in the calculation of the compensated absences liability when the payments are considered directly and incrementally associated with the leave. Directly associated means the amount of the payment is a function of salary to be paid (that is, payment amount depends on salary amount to be paid). Incrementally associated means the entity will make the payment in addition to the payment for the salary. Similar to the compensated absences liability, it is measured using the rates in effect as of the date of the financial statements with changes in the pay rate reflected in the period of change. An important difference is that for leave that has not been used, the expense for salary-related payments associated with a defined contribution pension or defined contribution OPEB is recognized as pension or OPEB expense, but it is still reported as a compensated absences liability as opposed to a pension or an OPEB liability. For leave that has been used, salary-related payments related to a defined contribution pension or defined contribution OPEB should be included in a pension or an OPEB liability.
Sabbatical leave is specifically within the scope of the GASB statement if the employee is not required to render significant services to the employer during the leave (that is, the leave is unrestricted). Restricted sabbatical where the employee is required to perform different services to the employer is not a compensated absence.
What are the changes in the financial statement footnote requirements?
The GASB statement specifies that the reporting requirements of long-term liabilities that were originally included in the GASB Statement No. 34 reporting model is applied to compensated absences. However, entities now have the option to present either of the following:
- The increases and decreases in the liability as separate items in the footnote
- A net increase or decrease in the liability, with the footnote indicating the amount is a net amount
Previous guidance requiring disclosure of the fund used to liquidate compensated absences was removed from the requirements.
When does this take effect?
The provisions of the GASB statement are effective for fiscal years beginning after Dec. 15, 2023. Early adoption is permitted, and entities should apply the provisions on a retroactive basis by restating the financial statements of the earliest period presented. The cumulative effect of the change would be recognized as a change to the opening balance of net position of the earliest period presented.
What do entities need to consider?
Because compensated absences are common for units of state and local government, a change in the accounting and reporting model for compensated absences significantly affects governmental entities. These are some key considerations for implementation:
- Identify the applicable benefits offered to employees and compare those benefits to the new guidance to determine if compensated absence accounting is required.
- Determine whether applicable accounting systems have the capability to aggregate any new data and perform the necessary calculations.
- Determine whether any internal controls related to calculations of compensated absences need to be updated for any new compensated absence liabilities.
- Document the accounting entries for the applicable compensated absences.
- Consider the financial statement impacts, including the presentation of single-year financial statements versus comparative financial statements. This includes all applicable reporting documents, such as management’s discussion and analysis, and adoption of the GASB statement in the footnotes, including impacts on net position regarding the change in accounting principle.
