GASB 101 – Compensated Absences

Summary

The Governmental Accounting Standards Board (GASB) issued Statement No. 101 – Compensated Absences in June 2022. This new standard requires the government entity to record a liability and expense for all leave that has not been used if it meets certain requirements. The most common difference we will see from past accounting standards is that this will likely require a liability to be recorded for accrued sick leave hours earned and possibly other types of accrued leave, in addition to accrued vacation/paid time off (PTO). Previous accounting standards only required recognizing a liability if the benefit was vested and paid upon termination. The new accounting standard does not limit recognizing the liability to only vested benefits paid upon termination. Governmental entities are required to implement the new compensated absences standard for the years ended December 31, 2024, and later.

More Detailed Guidance

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

1. The leave is attributable to services already rendered (leave for which an employee has performed the services required to earn the leave).
2. The leave accumulates (leave is carried forward from the reporting period in which it is earned to a future reporting period during which it may be used for time off or otherwise paid in cash or settled through noncash means).
3. The leave is more likely than not (likelihood more than 50 percent) to be used for time off or otherwise paid in cash or settled through noncash means.

A government entity should evaluate whether leave is more likely than not to be used for time off, or otherwise paid in cash or settled through noncash means, by assessing relevant factors, including the following:

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

The most common type of leave that will need to be considered under GASB 101 that has not historically been accrued is sick leave, but keep in mind that different terminology may be used for similar purposes and there may be other types of leave that should be considered.

For the following types of compensated absences, a government entity should not recognize a liability until the leave is used:

1. Leave that employees are able to take as needed without specific limits (sometimes referred to as unlimited leave).
2. Holiday leave that is taken on a specific date and not at the discretion of employees.

Also, do not record a liability in the following situations:

1. Compensated absences dependent upon occurrence of a sporadic event, such as military leave, parental leave, bereavement leave, or jury duty.
2. Sabbatical if employees are required to perform certain duties during the sabbatical, such as research.
3. Leave is unlimited (no specific limits to leave accrual).

Do record a liability for the following situations:

1. Unrestricted sabbatical (no requirement to perform duties).
2. Pooled leave not attributable to a specific employee.

The compensated absences liability should also include salary-related expenses that are directly associated with payments for leave. This will generally include almost all payroll taxes and retirement contributions but would exclude health insurance premiums.

Implementation

Governmental entities should perform the following steps to implement GASB 101:

1. Review employee benefits documentation to identify all compensated absence benefits and identify which of these benefits carry over from one year to the next.
2. Identify which of these benefits are earned through prior service.
3. Identify which of these benefits are fully vested and will be paid out on termination. These benefits should be accrued at the full amount. No estimation of the percentage to be used is necessary.
4. For the benefits not paid out on termination but that meet the other requirements above, estimate the portion of the total accrued benefits that is more likely than not to be used or otherwise paid. The following demonstrates one example method for this calculation, but you may use another reasonable methodology if you believe it is more accurate:
   • Use payroll reports for the current and previous two years to calculate total leave hours used and total leave hours earned. Divide total leave hours used by total leave hours earned for the three years.
   • Run a report showing the total accumulated ending balance of these benefits as of the current year end. Use the percentage calculated in Step 4 above multiplied by this total to estimate the portion of the accrued benefits expected to be used.
   • Calculate salary-related expenses by dividing total benefits expense, less premiums for health, dental, and vision insurance, by total salaries expense. Multiply this percentage by the estimate calculated above.
5. Accrue a liability using your best estimate of the amount of accrued absences expected to be used, including salary-related expenses (see example method above).

Also consider whether accounting for accrued vacation/PTO is correct. This is the most common compensated absence considered in the past. If it was not accrued because it was not vested or for other reasons, it may need to be accrued now. Use the steps above to estimate the accrual. Also, if it was accrued in the past, but no salary-related expenses, such as FICA, were accrued, this should be done going forward.

Implementation should be done as a change in accounting principle, meaning prior periods should be restated and beginning net position restated in the first year presented, if practicable. This method is preferred because it will result in less impact on net income in the current year. Unless the usage and ending balances have materially changed over the last two years, we recommend concluding that the estimated liability is approximately the same for each of the past two years, which will result in no effect on net income for the prior year or the year of implementation. The only change to the financial statements will be adding the liability and decreasing beginning net position for the prior year.

Financial Statements Effect

The primary financial statements effects will be the additional liability recorded and a reduction of net position. Disclosures will also be added describing the accounting policy related to accrued compensated absences and the types of accruals included in liabilities. If the liability is not materially different from the amount of leave used each year, we recommend considering all of the liability to be a current liability. If a portion is presented as noncurrent, additional disclosure will be required showing the beginning balance, net change in the balance, and ending balance for each year presented.

Conclusion

GASB 101 is expected to result in significant additional liabilities being recorded for most government entities. Please let DZA know if you have any questions or need assistance with implementing this new accounting standard.