GASB Statement 101: A Unified Model for Compensated Absences

GASB Statement No.101, Compensated Absences, establishes a single, unified model for recognizing and measuring liabilities for compensated absences. The standard was created to address inconsistent accounting practices and improve consistency and comparability of financial reporting among governmental entities.

Key Requirements for Recognizing Compensated Absence Liabilities

Statement 101 requires liabilities for compensated absences be recognized for (i) leave that has not been used, and (ii) leave that has been used, but is yet to be paid in cash or settled through noncash means. 

Examples of compensated absences include vacation or annual leave, sick leave, paid time off, holidays, parental leave, bereavement leave, and sabbatical leave. 

Statement 101 requires a liability to be recognized for leave that has not been used, if all of the following conditions are met:

• The leave is attributable to services already rendered, 
• The leave accumulates (it rolls over to future periods and is not “use-it-or-lose-it”), and
• The leave is more likely than not (a greater than 50% chance) to be used for the time off or otherwise paid cash or settled through noncash means

Measuring the Liability: Applying the “More Likely Than Not” Threshold

The more likely than not threshold was intentionally set lower than probable to prevent the under-reporting of liabilities. In estimating the leave liability, the entity should consider relevant factors, such as employment policies and historical information about use or payment of compensated absences. Leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be included in the liability for compensated absences.

The liability should be based on the employee’s pay rate as of the financial statement date, and based on the amount of cash payment or noncash settlement to be made. However, if it is more likely than not that the leave will be paid at a different rate (e.g. a future rate upon termination), that portion of the liability should be measured using the different rate as of the financial statement date. 

Including Salary-Related Payments in the Compensated Absence Liability

Salary-related payments should also be included in the liability, including payments that are directly and incrementally associated with the compensated absence, such as the employer share of Social Security and Medicare taxes. GASB defines these terms below:

• Directly means the amount to be paid depends on the amount of salary to be paid, and 
• Incrementally associated means that the entity will make the payment in addition to the salary payment. 

Employer contributions to defined contribution plans are included in the liability only if they are incrementally associated. For example, if a plan only provides a match on leave time used while employed, but not on unused leave paid out at termination, the liability should only include the match for the amount of leave more likely than not to be used for time off while employed. 

Salary-related payments related to defined benefit pensions or defined benefit other postemployment benefit plans should not be included in the liability for compensated absences. 

Streamlined Financial Statement Disclosure Requirements

Statement No.101 allows entities to present changes to the liability for compensated absences on a net basis, if the net basis is clearly disclosed. However, entities may continue to disclose these changes on a gross basis, if preferred. Entities are no longer required to disclose which governmental funds are typically used to liquidate the liability for compensated absences.

Effective Date and Transition Guidance for GASB 101

Statement No.101 is effective for fiscal years beginning after December 15, 2023. Transition follows the guidance for a change in accounting principle in Statement No.100.

Is Your Implementation Roadmap Ready?

GASB Statement No. 101 is effective for fiscal years beginning after December 15, 2023. Don’t wait for your year-end reporting to discover a gap. Our insurance accounting specialists can review your existing compensated absence policies and historical data now to help you accurately measure your liability and ensure a smooth transition.

Connect with our team to start your GASB 101 readiness assessment.