Implementing GASB No. 101, Compensated Absences, requires governmental entities to take a deep dive into their current policies and procedures relating to compensated absences to fully understand the various benefits offered to employees.
Implementing GASB No. 101, Compensated Absences, requires governmental entities to take a deep dive into their current policies and procedures relating to compensated absences to fully understand the various benefits offered to employees. Under GASB 101, compensated absences refer to leave benefits for which employees receive: (1) cash payments for leave time used for time off; (2) other cash payments for unused leave time upon termination; or (3) non-cash settlements such as conversion to additional service time in a defined benefit pension plan. The significant change is leave to be used as time off. Governments have never accounted for this benefit prior to GASB 101. As a reminder, GASB-101 is effective fiscal year 2025 (i.e. now).
Recording Compensated Absences Liability
GASB-101 requires recognition of a liability for earned leave that has not been used or leave that has been used but unpaid or settled when the following criteria are met:
- Services already performed by the employee. Employer compensates the employee with vacation or sick time in exchange for services rendered according to the entity’s policies.
- Leave accumulates. Leave is carried forward from one reporting period to future periods and can be used as time off or settled in cash or through non-cash means.
- Lease is more likely than not (MLTN) to be used for time off, paid in cash, or settled through non-cash forms. MLTN means that the likelihood of occurrence is greater than 50 percent. Considerations for determining MLTN includes the entity’s policies or employment contracts, historical information (use or lose), eligibility criteria, and new policies that may affect the reliability of past experience as a basis for estimating future cash payment or settlements.
Salary-related payments which are directly and incrementally related to payments for compensated absences (cash and non-cash) are also accrued. These additional costs include Social Security, Medicare taxes, and defined contribution amounts. Salary-related payments for defined benefit pensions or other post-employment benefits (OPEB) plans are excluded when calculating liabilities for compensated absences. The related expenses are already recorded as pension expenses or OPEB expenses for school districts.
Once all the eligible types of leaves are identified and determined by employee with balances of unused hours as of the date of the financial statements, the liability is calculated using the employee’s pay rate as of that date. The entity should also establish and document a policy to calculate the liability including recognizing the short-term portion or due within one year.
The two approaches to estimating the payments for unused sick leave are:
- Termination payments method - based on past trends using a days-paid approach, a dollars-paid approach, or other approach as determined by the employer
- Vesting method - estimates the liability by calculating the amount of sick leave that is expected to become eligible for payment at termination.
The Blue Book has in-depth illustrations to help with which ever method is selected.
Compensated absences will continue to be presented on the government-wide financial statements and proprietary funds financial statements. Liabilities for compensated absences will be recognized for leave that is unused; leave that has been used, but unpaid or settled; and applicable salary-related payments. The various types of compensated absences include vacation leave, sick leave, paid time off, holidays, parental leave, jury duty leave, military leave, bereavement leave, and unrestricted sabbatical leave. Payments and settlements can occur during employment or upon termination of employment (end of active service, voluntary resignation, or retirement).
Exceptions
Holidays are not accrued as GASB Board indicates that “the benefit of recognizing them before they are used would be minimal.”
Due to the sporadic nature of parental leave, military leave, and jury duty, these types of leave are not recognized until the leave starts.
Note Disclosure
Governmental entities can either present the increases and decreases but with properly supported amounts, or net change in liability as long as they indicate that it is a net amount.
Source: http://gars.gasb.org
They key to gathering complete and accurate records necessary for calculating compensated absences is a strong collaboration between the Finance and Human Resources Departments. Finding the best method for calculating compensated absences liability may require a significant amount of time to complete. Time is running out. Entities should have started the process by now. The half-year of fiscal year ending June 2025 was already over!
Sources:
- Blue Book GAAFR
- Governmental GAAP Update Service Volume 24, Issue 16 August 30, 2024 (Wolters Kluwer) – Answer Connect
- CPA Hall Talk – Charles Hall
