Governed by GASB? Learn the New Rule on Compensated Absences

If your organization is governed by the Governmental Accounting Standards Board (GASB), there is a new rule to know on compensating employee absences.

The new rule is Statement No. 101, Compensated Absences (GASB 101), which supersedes Statement No. 16, Accounting for Compensated Absences (GASB 16). GASB is seeking to clarify guidance for certain types of leave to reduce inconsistent application of the related accounting standard.

Implementing GASB 101 is required for fiscal years beginning after December 15, 2023, and all reporting periods thereafter. Early implementation is encouraged.

What the new GASB compensated absences rule covers

GASB 101 lays out how to account for and report on compensated absences and associated salary-related payments. It defines a compensated absence as leave where an employee receives cash and/or non-cash settlements for leave earned from prior service. The standard identifies various forms of leave and explains when and how each type may qualify as a compensated absence.

Examples of leave include:

• Military leave
• Jury duty
• Parental leave
• Holidays
• Unlimited time off
• Paid time off
• Sick leave
• Vacation time
• Bereavement
• Floating holidays
• Compensatory time
• Sabbatical

The most significant divergence from GASB 16 is how to account for sick leave. Previously, sick leave would be recorded to the extent it was probable the employer would compensate the employee upon termination or retirement. GASB 101 removes this criterion and, as a result, many entities will have an increased compensated absences balance as compared to the superseded guidance.

Recording the compensated absences liability

GASB 101 states liabilities for compensated absences should be recorded for leave that hasn’t been used and for leave that’s been used but not yet paid. To qualify for the compensated absences liability, the leave must meet the following criteria:

• The leave is attributable to services already rendered,
• The leave accumulates, and
• The leave is more likely than not to be used or settled through cash and or non-cash means.

Considerations for determination of leave meeting the more likely than not threshold include:

• The entities employment policies related to leave
• Historical information about use, payment, and forfeiture of leave
• Information that would indicate the historical information may not be representative of future trends

Since this is a change in accounting principle, GASB 100, Accounting Changes and Errors Corrections is applicable the year of implementation which describes the restatement and disclosure requirements.

Exceptions to the new GASB compensated absences rule

Military leave, jury duty, and parental leave

The standard excludes these three types of absences from the compensated absences estimate. They’re excluded due to the sporadic nature of these leave types and the applicability to a relatively small portion of employees. However, the standard directs entities to book a liability related to these leave types when the leave commences for an employee.

Floating holidays

GASB 101 directs entities to record the liability for unlimited leave and standard holidays when the leave is taken. This exception to the rule does not apply to floating holidays.

Sabbaticals

Leave associated with sabbaticals depends on the nature of the sabbatical. Specifically, sabbaticals where an employee is not required to perform significant duties (i.e., unrestricted sabbatical) should be recorded in accordance with the general rule. GASB says in instances when a sabbatical requires an employee to perform significant duties, the employee is not paid for leave but rather paid for the duties performed during that period, and thus the sabbatical does not qualify as a compensated absence.

Defined benefit postemployment benefits

Leave that is more likely than not to be settled through conversion to defined benefit post-employment benefits should be excluded from the compensated absences liability, as it’s already included in the pension and or other post-employment benefits liability.

Disclosure requirements

Once the amount of time related to compensated absences has been estimated, the entity must calculate the total cost of the compensated absences liability as of the fiscal year end date. GASB 101 directs entities to measure liability by multiplying the time estimated by the associated employee’s pay rate at the measurement date and any applicable salary-related payments, such as Social Security and Medicare taxes.

To qualify as a salary-related payment, the payment must be directly and incrementally associated with the calculated liability. If some or all the leave is more likely than not to be paid at a different rate than the employee’s pay rate at the time of payment, the entity should adjust the liability accordingly.

While GASB considered expanded disclosures beyond those required in the superseded GASB 16 standard, GASB 101 doesn’t require additional disclosures. The entity is required to present either the individual increase and decrease or the net increase/decrease of the liability for each fiscal year presented. However, if the entity elects to present on a net basis, this election must be disclosed.

GASB 101 doesn’t require an entity to separately identify leave that has been used but not yet paid. It’s expected this leave would be included in the accrued payroll liability, and the cost to bifurcate this portion of the liability wouldn’t outweigh any measurable benefits.

An entity is required to separate the current and long-term portion of the compensated liability.

How to implement the new GASB compensated absences rule

Calculating the initial compensated absences liability for implementing GASB 101 may take a significant time and resources. Start with identifying resources to compile historical data for analysis. Once the data is compiled, it will need to be analyzed and a methodology for measurement will need to be determined.

Entities should document their methodology so it can be audited. Entities also should consider if the internal control environment needs to be updated to calculate the compensated absences liability.

How we can help

There are a variety of leave types and bifurcation of employee population entities may need to consider. If your entity has not started — or has started but is struggling to determine how to compile, analyze, and document the new rules — CLA is here to help.

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