The Governmental Accounting Standards Board (GASB) issued Statement No. 101 (GASB 101), Compensated Absences, in June 2022. A compensated absence refers to paid leave earned by employees for time off, such as vacation leave, sick leave, holiday leave, or other types of paid time off.

GASB 101 provides updated guidelines for how governmental entities should account for these benefits, replacing portions of prior guidance under GASB Statement No. 16. The goal of the update is to bring greater clarity, consistency, and relevancy to compensated absences reporting.

Changes Under GASB 101

GASB 101 introduces a refined approach to recognizing compensated absences liabilities. Here are the main updates:

1. Recognition Criteria: Under GASB 101, compensated absences liabilities are recognized when the benefit is both earned by the employee and probable of being used. This represents a shift from previous guidance, which based liability recognition on the employee’s ability to carry forward leave into future periods.
2. Measurement of Liability: GASB 101 specifies that liabilities should be measured based on the pay rate in effect at the time the employee is expected to use the leave. This approach reflects the future financial obligation associated with the leave rather than the historical rate when the leave was earned.
3. Types of Leave: The statement clarifies the types of leave that qualify as compensated absences, including vacation leave, sick leave, sabbaticals, and other forms of compensated time off. For example, sick leave is now recognized as a liability only if it is probable that the employee will use it as paid time off.
4. Disclosure Requirements: GASB 101 requires enhanced footnote disclosures. Entities must disclose details on the types of compensated absences, their policies, and the methodology used to determine liabilities. This transparency aims to provide stakeholders with a clearer understanding of an organization’s future financial commitments.

Implementation Timeline

Public sector organizations are required to apply GASB 101 for fiscal years beginning after December 15, 2023. If your organization hasn’t yet implemented the changes, now is the time to review your policies and systems to ensure compliance for the upcoming fiscal year.

Benefits of GASB 101

The guidance under GASB 101 brings several benefits:

• Improved Consistency: The updated criteria and measurement approach reduce variations in how entities account for compensated absences, promoting greater consistency across the public sector.
• Enhanced Transparency: Expanded disclosures give stakeholders deeper insight into an entity’s compensated absence policies and potential liabilities, enhancing the accuracy of financial reporting.
• More Relevant Information: Measuring liabilities based on future pay rates offers a clearer picture of the actual financial impact, helping decision-makers better understand and prepare for long-term obligations.

Implementation Insights for GASB 101

One significant change of the standard deals with the revised sick leave liability calculation, which will impact many organizations. Entities should review their leave policies and internal accounting systems to ensure compliance with GASB 101. Accounting teams may need to collaborate with HR departments to track when leave is earned, calculate liabilities based on expected future pay rates, and prepare the necessary disclosures.

Key clarifications include:

1. Leave Used During Employment: When employees use leave during their employment (e.g., taking paid time off for sick days), the liability recognized should reflect the compensation value of the leave at the employee’s standard rate of pay. This ensures the cost of leave taken is accounted for in real-time and matches the amount employees are entitled to receive while on leave.
2. Leave Paid Out at Termination: Some leave policies allow employees to accrue sick or vacation leave, which may be paid out upon termination or retirement at a rate different from the standard hourly or salary rate. For example: Leave used during employment might be compensated at the full pay rate, but unused leave paid out upon separation might be at a reduced rate (e.g., 50% of the accrued value). Alternatively, the payout rate could be higher if leave accruals include incentives, bonuses, or special arrangements upon retirement.
3. Recognition of Liability for Paid Leave: The liability for leave that may be paid out at a different rate should be calculated based on the expected payout rate. This requires entities to consider both the quantity of accrued leave and the probability that it will be paid out in cash or other benefits at the adjusted rate.
4. Key Considerations for Accounting:
   1. Separate Calculations: Governments may need to separately track leave expected to be used versus leave expected to be paid out at termination to ensure accurate liability measurement.
   2. Historical Data Analysis: Analyzing historical patterns of leave usage and payouts can help in estimating the proportion of leave likely to result in payouts at a different rate.
   3. Policy Implications: Entities should evaluate leave policies to ensure alignment with GASB 101’s requirements, including clear documentation of payout rates and conditions for different types of leave.

These requirements aim to improve the transparency and accuracy of compensated absence liabilities, ensuring that financial statements present a true representation of obligations related to employee benefits.

As organizations prepare for this new standard, a proactive approach to implementation will help ensure smooth compliance and more accurate financial statements. Complete the form below to schedule a consultation with SEK and discover how we can assist you in implementing the new standard effectively.