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GASB Statement No. 101 Compensated Absences

The Governmental Accounting Standards Board (GASB) recently issued Statement No. 101 Compensated Absences which updated the recognition and measurement guidance for compensated absences. GASB issued the statement to replace GASB Statement No. 16 (issued in 1992) which was outdated and did not address the types of leave currently being offered by governments. For all governmental entities, this new standard will be effective beginning with calendar year December 31, 2024, and fiscal year June 30, 2025, year-ends; however, early implementation is allowed. The impact of implementation will vary so it is important to gain an understanding now and begin the process of evaluating the impact of the standard on your entity.

The standard defines compensated absences as leave for which employees may receive one or more (a) cash payments when the leave is used for time off; (b) other cash payments, such as payment for unused leave upon termination of employment; or (c) noncash settlements, such as conversation to defined benefit post-employment benefits. Some examples of compensated absences include vacation (or annual) leave, sick leave, paid time off (PTO), holiday leave, parental leave, bereavement leave, and certain types of sabbatical leave.

For financial statements prepared using the economic resources measurement focus, this statement provides three criteria for recognition of a liability for leave that has not been used: the leave is attributable to services already rendered, the leave accumulates and the leave is more likely than not to be used for time off or otherwise paid and settled through noncash means. The ‘more likely than not’ criteria is a key change from GASB Statement No. 16 which used a threshold of ‘probable’. While GASB Statement No. 16 did not provide a definition of probable, probable was generally considered to be a threshold of greater than 80%, which often resulted in governments only accruing leave that would be paid upon termination. GASB Statement No. 101 defines ‘more likely than not’ to be a likelihood of more than 50%. It is expected that the change from ‘probable’ to ‘more likely than not’ will result in an increase in compensated absence liabilities for many entities. The standard clarified that leave liabilities should be measured using the rate of pay in effect as of the balance sheet date and should include salary related payments such as payroll taxes.

Each governmental entity differs in the type of compensated absences it offers its employees and varying employment policies can impact the likelihood and timing of leave usage. To ensure GASB Statement No. 101 is implemented correctly, governments need to begin reviewing their leave policies to determine if there are provisions for which leave may or may not be paid depending on certain conditions. Governments that have leave policies which create uncertainty in the likelihood of payment will need to gather and evaluate historical data to determine the likelihood of future leave usage. Implementation of GASB Statement No. 101 is considered a change in accounting principle which should be implemented retroactively by restating financial statements for all prior periods presented.

We expect GASB Statement No. 101 to impact many governmental entities and it is important that each governmental entity begin compiling the necessary data to properly implement this statement and correctly accrue compensated absences going forward. If you need additional assistance with GASB Statement No. 101 or other governmental issues, please contact a member of our governmental accounting team.

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