GASB Statement No. 101: Changes to Compensated Absences for Government Entities
The Governmental Accounting Standards Board (GASB) issued Statement No. 101 to provide updated guidance on the recognition and measurement of compensated absences for government entities. This statement aims to enhance the clarity and consistency of financial reporting for compensated absences, ensuring that financial statement users receive accurate and comparable information.
Digging Into GASB Statement No. 101
Here’s an in-depth look at GASB Statement No. 101.
1. Objective of GASB Statement No. 101
The primary objective of GASB Statement No. 101 is to update the recognition and measurement guidance for compensated absences to better meet the needs of financial statement users. This is achieved by aligning the guidance under a unified model and amending certain previously required disclosures.
2. Recognition
Compensated absences are defined in GASB Statement No. 101 as leave for which employees may receive one or more:
- Cash payments when the leave is used for time off
- Other cash payments (such as payments for unused leave upon termination of employment)
- Noncash settlements (such as conversions to defined benefit post-employment benefits)
The payment or settlement could occur during employment or upon termination of employment.
Examples of compensated absences include:
- Vacation (or annual) leave
- Sick leave
- Paid time off (PTO)
- Holidays
- Parental leave
- Bereavement leave
- Certain types of sabbatical leave. NOTE: Sabbatical leave during which an employee is not required to perform any significant duties for the government is a compensated absence. Sabbatical leave during which an employee is required to perform duties of a different nature (e.g. research instead of teaching) is not a compensated absence.
GASB Statement No. 101 requires that liabilities for compensated absences be recognized for:
- Unused leave: Leave that has not been used.
- Used but unpaid leave: Leave that has been used but not yet paid in cash or settled through noncash means.
Unused Leave
A liability should be recognized for unused leave if all of the following are true:
- The leave is attributable to services already rendered.
- The leave accumulates and can be carried forward to future periods.
- It is more likely than not that the leave will be used or otherwise paid or settled.
In determining whether it is more likely than not that leave will be used or paid in cash or settled through noncash means, a government should assess relevant factors in the measurement of the liability including:
- Employment policies
- Whether leave is, or will become, eligible for use or payment in the future
- Historical information about the use, payment or forfeiture of compensated absences. NOTE: this may result in some governments recognizing less compensated absences due to incorporating expected forfeitures.
- Information known to the government that would indicate that historical information may not be representative of future trends or patterns.
Leave that is more likely than not to be settled through conversion to defined benefit post-employment benefits should not be recognized as a liability.
The government would not recognize a liability until the leave is used for the following types of compensated absences:
- Leave that employees are able to take as needed without specific limits (unlimited leave).
- Holiday leave that is taken on a specific date not at the discretion of employees (floating holidays would likely qualify for liability recognition).
The government would not recognize a liability until leave commences when the compensated absences are dependent on the occurrence of a sporadic event, for example:
- Parental leave
- Military leave
- Jury duty leave
3. Measurement of Liabilities
The measurement of liabilities for compensated absences related to unused leave generally use the employee’s pay rate as of the date of the financial statements with the following exceptions:
- If some or all of the leave is more likely than not to be paid at a rate different from the employee’s pay rate, the government should use the different rate at the financial statement date. (e.g. leave is paid upon termination at ½ the employees pay rate at time of termination – liability would be calculated using ½ the employees pay rate at the financial statement date)
- If leave is not attributable to a specific employee (e.g. donated to a shared pool), the liability should be estimated using the pay rate for the eligible employee population.
- If some or all of the leave is expected to be settled through noncash means, other than conversion to a defined benefit plan, a government should measure the liability based on the amount for which it is more likely than not to be settled.
Changes to the measurement of liability due to changes in pay rates should be recognized in the period of change.
For leave that has been used but not yet paid or settled, the liability should be measured at the amount of the cash payment or noncash settlement to be made.
4. Modified-Accrual Accounting
Expenditures for compensated absences in governmental funds that use a current economic resources measurement focus and modified-accrual accounting would continue to recognize compensated absences expenditure as the payments are made.
5. Disclosure Requirements
GASB Statement No. 101 amends the existing requirement to disclose the gross increases and decreases in the liability for compensated absences. Governments are now allowed to disclose only the net change in the liability, provided they identify it as a net change. In addition, governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences.
6. Effective Date and Transition
The requirements of GASB Statement No. 101 are effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. Earlier application is encouraged. Application of this statement should be made retroactively by restating prior periods.
Conclusion
By updating the recognition and measurement guidance and refining disclosure requirements, GASB Statement No. 101 enhances the clarity and consistency of financial reporting. This ensures that financial statement users receive accurate and comparable information, ultimately contributing to better decision-making and transparency in governmental financial reporting.
This statement may significantly impact a government’s liabilities for compensated absences, as there will likely be more types of compensation that meet the criteria for liability recognition.