GASB Statement No. 101 Compensated Absences (GASB-101) is bringing some important changes for how governments report different types of leave. The goal of the new statement is to improve financial reporting by allowing a more unified recognition and measurement model.
This is the first change to compensated absences since GASB Statement No. 16 released in 1992 GASB-101 will be effective for fiscal years beginning after December 15, 2023. June 30th governments will need to implement on July 1, 2024.
The definition of a compensated absence
A compensated absence includes benefits for employees such as vacation leave, sick leave, paid time off, holidays, parental leave, bereavement leave, and certain types of sabbatical leave.
Sabbatical leave, where an employee is required to perform duties of a different nature for the government, rather than not performing any significant duties, is not considered a compensated absence.
Governments will need to recognize a liability for compensated absences for the following situations:
- Leave that has been used but not yet paid in cash or settled through noncash means
- Leave that has not been used
The definition of leave under GASB-101
Leave that has not been used should be recognized if the following occurs:
- The employee has performed the services required to earn the leave
- The leave accumulates
- The leave is more likely than not (MLTN) to be used for time off or otherwise paid in cash or settled through noncash means (not including any leave that is more likely than not to be converted to defined benefit postemployment benefits).
MLTN is defined in GASB-101 as a likelihood of more than 50%. The soon-to-be former GAAP measures the liability at probable. Many practitioners judge ‘probable’ to be more than 80%, but there is no standard definition of ‘probable.’ The change to MLTN will likely result in higher liabilities for some governments as they implement GASB-101.
The following factors should be considered by the government as they evaluate whether a leave is more likely than not:
- The government’s employment policies
- Whether leave that has been earned is, or will become, eligible for use or payment in the future
- Historical information relating to compensated absences
- Any known factors that would be more representative of expected future trends than the historical information available
If a portion or all the leave is more likely than not to be paid at a different rate, a government should measure that portion of the liability using that different rate as of the date of the financial statements.
The impact to government organizations under GASB-101
Some important factors to consider for how disclosures will change include:
- The liability can now be disclosed as a net change rather than disclosed as gross increases and decreases in a liability for compensated absences.
- Governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences.
These changes will take time to gather the information for the compensated absences liability calculation, it is important for governments to get started on this implementation now. For states and other large governments, actuaries may need to be engaged.
The implementation of GASB-101 will require preparation and planning.