GASB 101: what counts as a compensated absence liability now

GASB Statement No. 101 replaced the compensated absences guidance that governments had followed for decades with a single recognition model. It applies to fiscal years beginning after December 15, 2023. For many governments the liability rose on adoption, and the reason was almost always sick leave.

One test for most leave

Under the prior guidance, vacation and sick leave were treated differently. Sick leave was generally recognized only to the extent it was expected to be paid in cash at termination or retirement. Sick leave that employees would use as paid time off was left out.

GASB 101 applies one test to all leave types. A liability is recognized for leave that meets three conditions:

1. It is attributable to services already rendered.
2. It accumulates, meaning it can be carried forward beyond the period in which it was earned.
3. It is more likely than not, meaning a likelihood of more than 50 percent, to be used for time off or otherwise paid in cash or settled through non-cash means.

The third condition is the change that matters. Sick leave that employees are expected to use as paid time off now counts, not only the portion that will be cashed out. For governments with generous carryover provisions and long-tenured workforces, that is a significant addition.

Leave that will be settled by converting it to a defined benefit pension or OPEB benefit, such as service credit at retirement, is excluded here and recognized under GASB 68 or 75 instead, so it should not be counted twice.

What stays out

Some leave is recognized only when it is taken, not as it accrues. This includes leave that depends on a sporadic event, such as parental leave, military leave and jury duty, and leave that is unlimited in amount. Holiday leave that is taken on a specific date without any accumulation is also recognized when used.

How the liability is measured

The liability is measured at the employee's pay rate as of the financial statement date, including any pay increases that have been granted but not yet reflected. It also includes salary-related payments the employer will make when the leave is used or paid, such as the employer's share of Social Security and Medicare taxes and employer contributions to a defined contribution retirement plan. Contributions to a defined benefit pension or OPEB plan are not added, because those obligations are already measured in the GASB 68 and 75 liabilities.

Why the number can move from year to year

The judgment at the center of GASB 101 is the more-likely-than-not estimate: how much of each employee's accrued leave will actually be used or paid. The standard expects that estimate to rest on the government's own experience: historical usage rates by leave type, termination and retirement patterns and payout policy. A government that assumes all sick leave will be used, or none of it, has not made an estimate.

Because the measurement is sensitive to pay rates, leave balances and the usage assumption, the liability can move materially in a single year even when nothing about the policy has changed. Auditors will ask how the estimate was developed and why it changed. A gain and loss reconciliation that separates the effect of new accruals, leave used, pay increases, assumption changes and population changes answers that question before it is asked.

Disclosure changes

GASB 101 simplified the note disclosure in two ways. Governments may present the net change in the liability for the year rather than separate gross increases and decreases, as long as they state that it is a net amount. And the requirement to disclose which governmental funds have typically been used to liquidate the liability was removed.

Our approach

We build the estimate from employee-level leave and payroll data, apply usage and payout rates drawn from the government's own history and reconcile the result to the prior year person by person. Finance teams receive the liability, the journal entry support and a gain and loss reconciliation their auditors can follow, in the same format each year.

This article is general information about the topics discussed and is not actuarial, legal or tax advice for any specific plan or employer.