Breaking Down GASB Statement No. 101: What’s New with Compensated Absences?

In June 2022, the Governmental Accounting Standards Board (GASB) rolled out Statement No. 101, bringing some big changes to how we handle compensated absences. This new standard kicks in for fiscal years starting after December 15, 2023. Let’s dive into what this means for government entities and why it’s a game-changer in public-sector accounting.

What Are Compensated Absences?

Compensated absences are the leave benefits employees earn, like vacation, sick leave, parental leave, military leave, and jury duty leave. These can be paid out in cash or converted into other benefits, like post-employment perks.

Recognition and Measurement Criteria

Under the new rules, you need to recognize liabilities for compensated absences if the leave:

– Is earned from services already provided by the employee.

– Accumulates over time.

– Is more likely than not to be used or paid out.

For example, vacation leave that builds up and gets paid out when someone leaves must be recognized as a liability. On the other hand, certain types of leave, like parental leave, are only recognized when the leave starts.

Measuring Liabilities

Generally, you measure these liabilities using the employee’s pay rate as of the financial statement date. But if the leave is expected to be paid at a different rate, like a reduced rate upon termination, you should use that rate.

Salary-Related Payments

The statement also says you need to include salary-related payments that are directly and incrementally tied to compensated absences. This includes things like the employer’s share of Social Security and Medicare taxes, which are directly linked to the salary paid for the leave.

Financial Statements and Disclosures

For financial statements using the current financial resources measurement focus, you should recognize expenditures for the amount that would typically be liquidated with available financial resources. Plus, the new standard simplifies disclosure requirements by letting governments disclose net changes in liabilities for compensated absences instead of detailing gross increases and decreases.

 Real-World Examples

1. Paid Time Off (PTO):

A Village offers PTO that can be used for vacation, sick time, or other personal time off. Employees earn PTO each month, and any unused PTO carries over to the next fiscal year without limits. Upon termination, employees are paid for any unused PTO.

The village must recognize a liability for the accumulated PTO because it is earned from services already provided, accumulates, and is more likely than not to be used or paid out.

2. Sick Leave:

A Fire District provides sick leave that employees earn each month. The sick leave carries over without limits, but any unused leave is forfeited upon termination.

The fire district must estimate how much of the sick leave is more likely than not to be used and recognize that portion as a liability. The leave is earned from services already provided and accumulates, but only the portion expected to be used is recognized.

3. Parental Leave:

A school district offers parental leave for employees due to the birth or adoption of a child. The leave does not accumulate and is only available when a specific event occurs.

The school district does not recognize a liability for parental leave until the leave starts. Once an employee goes on parental leave, a liability for the entire leave period is recognized.

4. Compensatory Time (Comp Time):

A Water District offers comp time to employees who work overtime. The comp time carries over at the end of the fiscal year and is paid out upon termination.

The Water District must recognize a liability for comp time because it is earned from services already provided, accumulates, and is more likely than not to be paid out.

Conclusion

GASB Statement No. 101 is a big step forward in accounting for compensated absences. By providing a unified model and updating disclosure requirements, it boosts the transparency and comparability of financial information. Government entities should gear up for its implementation to ensure compliance and take advantage of the benefits it brings to financial reporting.  If you have any questions on this standard and how it will affect your government, please reach out to us.

Wonder where to start? Check out part 2 of our blog series, Breaking Down GASB Statement No. 101.