Key Changes in Government Accounting for Compensated Absences

Key Takeaways:
  • GASB Statement No. 101 standardizes the accounting for compensated absences to ensure uniform recognition across all governments starting fiscal years after Dec. 15, 2023.
  • Governments must recognize liabilities for both used but unpaid leave and unused leave that meets specific criteria, including the likelihood of being used or paid out.
  • Certain types of leave, such as sporadic event leave, unlimited leave and specific date holiday leave, are exempt from being recognized as liabilities under the new GASB statement.

 

In June 2022, the Governmental Accounting Standards Board (GASB) issued Statement No.101, Compensated Absences. The purpose of this statement is to provide uniform accounting recognition across all governments and will result in more appropriately reflecting when the government will incur an obligation.  

This statement is effective for fiscal years beginning after Dec. 15, 2023. 

Compensated Absences Defined 

A compensated absence is leave for which employees may receive one or more: 

  • cash payments when the leave is used for time off; 
  • other cash payments, such as payment for unused leave upon termination of employment;   
  • or noncash settlements, such as conversion to defined benefit postemployment benefits. 

Examples of compensated absences include vacation (or annual) leave, sick leave, paid time off (PTO), holidays, parental leave, bereavement leave and certain types of sabbatical leave. The payment or settlement could occur during employment or upon termination of employment.  

Recognizing Compensated Absences & Related Liabilities  

A liability for compensated absences should be recognized for leave that has either been used but not yet paid or settled or leave that has not been used. In addition to the two types of leave noted above, a liability should also be recognized for certain salary-related payments, such as payroll taxes.  

  • Leave that has been used but not yet paid or settled 

A liability should be recognized when leave has been used but not yet paid out in cash or noncash means. Some governments will recognize a liability associated with this type of leave within an accrued payroll liability instead of compensated absence liability. The Statement allows governments to continue recognizing the liability in this fashion and does not require them to reclassify the leave from one liability to another. 

  • Leave that has not been used 

A liability for leave that has not been used should be recognized if all three of the following are true: 

  • The leave is attributable to services already rendered. 
  • The leave accumulates. 
  • The leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means. 

Leave may accrue at various speeds depending on your policy. Some leave policies allow for a set amount of hours to accrue per pay period, per month or annually. If the employee has performed services to earn their allowed leave, that satisfies “a.” above.  

If the policy is a “use it or lose it” type of policy that does not allow for hours to be carried over, no compensated absence liability should be recognized. In order for “b.” to be true, the policy must allow for the leave to accumulate and carry over to the next reporting period.  

The term more likely than not means a likelihood of more than 50%. In order for “c.” to be true, the government should consider the following: 

  • The government’s employment policies related to compensated absences. 
  • Whether leave that has been earned is or will become eligible for use or payment in the future. 
  • Historical information about the use, payment or forfeiture of compensated absences. 
  • Information known to the government that would indicate that historical information may not be representative of future trends or periods. 

Exceptions 

There are specific exceptions included in the Statement. These types of leave do not need to be recognized as a liability for the reasons noted below: 

  • Leave that is more likely than not to be settled through conversion to a defined benefit post-employment plan. This type of leave is already accounted for in a pension or OPEB liability account. 
  • Leave types dependent upon the occurrence of a sporadic event that affects a relatively small proportion of employees within the reporting period. Examples include parental leave, military leave and jury duty. A liability should only be recognized once this type of leave commences. For example: if an employee’s parental leave starts Dec. 1 and is expected to continue until March 1, the government should recognize a compensated absence related to this event for the estimated payments through March 1.  
  • Leave that employees can take as needed without limits, sometimes referred to as “unlimited leave.” This type of leave would be difficult for the government to quantify or estimate.  
  • Holiday leave that is taken on a specific date, not at the discretion of the employee. The Board believes that holidays typically are one day of leave at a time and recognizing them before they are used would be minimal. 

Footnotes 

GASB Statement No. 101 adjusted the disclosure requirements previously issued by GASB Statement No. 34. Under the new standard, governments have the option to record the increases and decreases in the liability separately or net the changes into a single figure. Additionally, the Board removed the requirement to disclose the fund in which the liability is liquidated.  

Under GASB Statement No. 34, governments are required to disclose the total compensated absences between current and long-term categories. When the Board surveyed preparers, one concern that was expressed was the difficulty in estimating the “amount due within one year.” Since some financial statement users rely on the current vs long term liabilities, the Board believes that the estimate of amount due within one year is still applicable and, as such, requires it to be estimated under GASB Statement No. 101. The Board did not provide guidance on how best to determine the estimate but instead allows each government to establish a policy to estimate the current portion in a way that best fits the individual government.  

Reviewing your compensated absences policies and calculating the liability based on your specific policies may seem daunting, but we are here to help. Consult with an Adams Brown advisor to get you started on the right foot. 

Access the complete standard including appendices here.