In June 2022, the Governmental Accounting Standards Board (GASB) issued updated guidance for the reporting of compensated absences effective for fiscal years beginning after December 15, 2023, but earlier application is encouraged.
Lupe Garcia, CPA and audit partner with Whitley Penn, states, “this is actually a pronouncement that school districts may want to consider implementing early as it eases reporting and disclosure requirements in the following ways:
- It amends the existing requirement to disclose the gross increases and decreases in a liability for compensated absences to allow governments to disclose only the net change in the liability (as long as they identify it as a net change).
- Governments are no longer required to disclose which governmental funds typically have been used to liquidate the liability for compensated absences.
The new guidance replaces GASB standards issued in 1992. Improvements to the reporting standards were initiated in August 2018. During the research phase of the update process several issues with existing standards were identified including a lack of guidance for certain types of leave and inconsistent application of existing standards.
GASB Statement 101—Compensated Absences requires that liabilities for compensated absences be recognized for (1) leave that hasn’t been used and (2) leave that has been used but not yet paid in cash or settled through noncash means. A liability should be recognized for leave that hasn’t been used if:
- 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 in cash or settled through noncash means.
Only leave that accumulates should be recognized as a liability. Leave that doesn’t accumulate and isn’t used isn’t considered a liability and doesn’t need to be reported in a financial statement. For example, unused leave that’s forfeited at the end of the fiscal year under a “use-it-or-lose-it” policy wouldn’t be considered a liability.
A compensated absence is leave for which employees may receive one or more of the following:
- Cash payments when the leave is used for time off;
- Other cash payments, such as payment for unused leave upon termination of employment; or
- Noncash settlements, such as conversion to defined benefit postemployment benefits.
Compensated absences generally don’t have a set payment schedule. Examples of compensated absences include vacation (or annual) leave, sick/personal leave, paid time off (PTO), holidays, compensatory time, bereavement leave, and certain types of sabbatical leave (e.g., during which an employee is not required to perform any significant duties for the government).
Other types of paid leave that must be recognized as a liability when the leave is used, as opposed to accumulated, include parental leave, military leave, and jury duty. Holiday leave that is taken on a specific date, not at the discretion of the employee, also isn’t recognized as a liability until the leave is used. However, a floating holiday taken at the discretion of the employee is recognized as a liability.
Measuring a Liability
In general, an employee’s pay rate as of the date of the financial statements should be used to measure a liability for leave that hasn’t been used. A liability for leave that has been used but not yet paid or settled should be measured at the amount of the cash payment or noncash settlement to be made. Certain salary-related payments that are directly and incrementally associated with payments for leave also should be included in the measurement of the liabilities.
If some or all of the leave is more likely than not to be paid at a rate different from the employee’s pay rate at the time the payment is made, a government should measure that portion of the liability using the different rate as of the date of the financial statements. For example, if leave is paid upon termination of employment at one-half of an employee’s pay rate at the time of payment, the leave that is more likely than not to be paid upon termination of employment (instead of being used for time off) should be measured using one-half of the employee’s pay rate as of the date of the financial statements.
If the leave isn’t attributable to a specific employee as of the date of the financial statements (for example, if leave has been donated to a shared employee leave pool), a government should measure the liability using an estimated pay rate that is representative of the eligible employee population.
A liability should be reported when leave is used for time off but hasn’t yet been paid in cash or settled through noncash means. That liability, including any applicable salary related payments, should be measured at the amount of the cash payment or noncash settlement to be made for the use of the leave.
The liability for compensated absences should continue to be reported in two components: the amount estimated to be due within one year and the amount estimated to be due in more than one year (although those amounts may be combined with other long-term liabilities on the face of the financial statements).
Coordinate with Finance
HR staff need to be aware of the new standards and work with their finance department to implement necessary reporting requirement changes. Questions about accounting standards and methods for reporting should be directed to your finance department.
April Mabry oversees HR Services training services, member library products, and the HRX newsletter. She has provided HR training and guidance to Texas public schools since 1991. Mabry was a classroom teacher for 11 years in Texas and Michigan.
Mabry has a bachelor’s degree in education from the University of Michigan and certification as a professional in human resources (PHR) and is a SHRM-CP.
Subscribe to HRX
Stay up to date with all the latest HR news and trends by joining the HRX mailing list!