Understanding the GASB Update for Compensated Absences

By Katherine Patnaude, CPA, Partner

Governmental Accounting Standards Board (GASB) Statement No. 101 updates the recognition and measurement guidance for compensated absences and amends required disclosures. This statement is effective for fiscal years ending December 31, 2024 and later.

We invite you to join our webinar How to Effectively Implement GASB 101: Compensated Absences on November 20 at 2 p.m. for a breakdown of the latest guidance. In advance of this webinar, read on for details about GASB No. 101, including:

• The definition and examples of compensated absences.
• Liabilities that should/should not be recognized and information on salary-related payments.
• Guidelines for implementation, likelihood of use and measurement of the leave.

What We See is New

The largest change we see in the guidance is that the amount of leave an employee is likely to use in the future must now be considered (not just the payout on termination, death or retirement).

• For example, if your benefit period is the calendar year but the fiscal year ends June 30, there is leave that accumulates for the six months between June 30 and December 31, when any remaining leave is lost (even if the leave is use it or lose it).
• You will now need to consider the likelihood of the employee using that leave in that six-month period.

Also, regarding sick leave, most governments only record a liability if there is an expected payout; use of accumulated leave must now be considered. For agencies that have been recording a liability for vacation, no change in methodology is expected.

Compensated Absences, Defined

A compensated absence is defined as leave for which employees may receive one or more of the following:

1. Cash payments when the leave is used for time off.
2. Other cash payments, such as payment for unused leave upon termination of employment.
3. Noncash settlements, such as conversion to defined benefit post-employment benefits.

Examples include paid time off and holidays, as well as the following forms of leave:

• Vacation
• Sick
• Parental
• Bereavement
• Unrestricted sabbatical (where an employee is not required to perform any significant duties for the government)

Liabilities

A compensated absences liability (including applicable salary-related payments) should be recognized in government-wide and proprietary fund financials for a leave that:

• Has not been used.
• Has been used but not yet paid or settled.
  • This liability should be measured at the amount of the cash payment or noncash settlement.
  • Note that theoretically, this is a compensated absence. In reality, it would be recorded as accrued payroll. In this case, the liability is already recorded and the leave balance would not need to be reclassified.

For financial statement disclosures, separate increases and decreases in the long-term liabilities note may be presented but are no longer required. The net increase/decrease in the liability may be presented instead.

When / When Not to Recognize a Liability

A liability should be recognized if the leave:

1. Has been earned,
2. Accumulates and
3. Is more likely than not to be used or paid/settled.

Don’t recognize a liability for a leave:

• More likely than not to be settled through conversion to defined benefit post-employment benefits.

Don’t recognize until the leave is used for:

• Unlimited leave.
• Holiday leave where the date is not at the discretion of the employee.
• Leave types that are dependent on the occurrence of a sporadic event that affects a relatively small proportion of employees (the liability is recognized when the leave commences).
  • Ex: parental leave, military leave, jury duty leave

For example, if the government has a June 30 year end and an employee who is eligible for six weeks of parental leave has a baby two weeks before year end, then the remaining four weeks would be reported as a liability. But if that same employee had the baby on July 1, then there would be no liability recognized as of June 30. As with all GASB statements, the government need not apply the requirements to immaterial items; in all likelihood, this type of leave would not be material to be recorded, but it should still be considered.

Salary-Related Payments

Include in the liability:

• Payments directly associated – the amount of the payment that depends on the amount of salary to be paid (e.g., Social Security, Medicare).
• Payments incrementally associated – a payment in addition to the salary payment (e.g., defined contribution pension or OPEB payment).

Salary-related payments related to defined contribution pension or OPEB for leave that:

• Has not been used: should be recognized as a compensated absence liability; however, the expense should be reported as pension or OPEB expense.
• Has been used: included as a pension or OPEB liability in accordance with GASB 68, 73 or 75.

Do not include in the liability:

• Payments related to defined benefit pension or OPEB.

Guidelines for Implementation

To evaluate more likely than not (likelihood of more than 50 percent), assess relevant factors including:

• Employment policies relating to compensated absences.
• Historical information about the use, payment or forfeiture of compensated absences.
• Other information that would indicate historical trends/patterns may not continue.

Be prepared – know what reports you will need to run at year end; some systems will only allow you to run the reports on a certain date.

Review your union contracts and personnel manuals to determine the types of leave offered and what leaves have the potential for accrual.

Measurement of the Leave

In general, use the employee’s pay rate at the fiscal year end. If the leave is:

• More likely than not to be paid at a different rate – use the different rate (e.g., leave paid on termination is paid at one-half of the employee’s pay rate – use one-half of the pay rate at the fiscal year end).
• Not attributable to a specific employee (e.g., a shared leave pool) – estimate the pay rate of the eligible population.
• More likely than not to be settled through noncash means – based on the settlement amount.

Critical Questions

In advance of our November 20 webinar where we’ll provide more comprehensive information about the GASB No. 101 update, remember that the largest changes in guidance that we see relate to future and accumulated leave. For leave that has accumulated at your year end, consider the following critical questions now:

1. What is the likelihood that leave will be used?
2. What is the likelihood that leave will be paid out on termination, death or retirement?
3. If the leave will be used or paid out, at what rate?

Contact Us

If you need assistance determining whether or not changes need to be made in your governmental entity’s financial records or reports due to GASB 101, please contact your PKF O’Connor Davies’ client service team or either of the following:

Katherine Patnaude, CPA
Partner
kpatnaude@pkfod.com | 860.419.3404

David Gannon, CPA
Partner
dgannon@pkfod.com | 908.967.6855