Understanding Compensated Absences: GASB 101 Explained
By Charles Hall | GASB
GASB issued Statement No. 101, Compensated Absences, and updated the recognition and measurement guidance for compensated absences to better meet the information needs of financial statement users.
GASB 101 is one of those standards where you might think you already know what you need to do, but things have changed when you look deeper. You may need to make new compensated absence accruals, ones you’ve never made before.
In this article, I address the following GASB 101 topics:
- Definition of compensated absences
- Recognition and measurement criteria
- Leave that has not been used
- Leave that has been used
- Salary-related payments
- Leave related to defined contribution plans
- Leave and defined benefit plans
- Holidays
- Notes to the financial statements
- Compensated absence examples
- The effective date of GASB 101
Compensated Absences Defined
So, what is a compensated absence?
It’s leave for which employees may receive one or more of the following:
- Cash payments for time off
- Other cash payments for unused leave upon termination or
- Noncash settlements, such as conversion to a defined benefit post-employment amount
These payments can occur during employment or upon termination of employment. The most common forms of compensated absences are vacation and sick leave, but it also includes paid time off (PTO), holidays, sabbatical leave, and parental leave.
Termination of employment includes the following:
- End of active service
- Voluntary resignation, or
- Retirement
Compensated Absences Recognition and Measurement
Financial statements using the current financial resources measurement focus recognize expenditures only for amounts to be liquidated with expendable available financial resources. This measurement focus is used in governmental funds such as the general fund.
As you would expect, compensated absences are recognized in financial statements using the economic resources measurement focus, such as enterprise funds (e.g., water and sewer funds) and government-wide financial statements. Such financial statements include short-term and long-term liabilities. Include salary-related amounts (see below) in the compensated absences liability and accrue liabilities for the following:
- Leave that has not been used, and
- Used leave that has not been paid for or settled
1. Leave that Has Not Been Used
The statement requires recognizing liabilities for compensated absences when:
a. the leave is attributable to services already rendered,
b. the leave accumulates, and
c. it is more likely than not to be used or paid.
a. Services Already Rendered
So, what are services already rendered? It is the work an employee has already performed to earn the leave. For example, suppose an employee works for a certain period and earns vacation or sick leave according to the employer’s policies. In that case, the leave is considered attributable to services already rendered.
b. Accumulate
What does accumulate mean? Leave that is carried forward from one reporting period to another is that which accumulates. For example, if an employee earns ten days of vacation leave each year and does not use all ten days in the current year, the unused days can accumulate and be carried over to the following year.
c. More Likely Than Not to be Used or Paid
And what is more likely than not to be used or paid? This phrase means there is a greater than 50% chance that the leave will either be taken as time off by the employee or paid out in cash (or through another non-cash settlement, such as conversion to post-employment benefits).
For example, if employees historically use their earned vacation leave within a year or two, the government would consider this leave more likely than not to be used.
Also, if the government typically pays employees for unused vacation days upon termination of employment, the leave is more likely than not to be paid.
Consider the government’s compensated absence policies and historical patterns to evaluate whether the leave is more likely than not to be used or paid.
Measurement Amount
Use the employee’s pay rate as of the date of the financial statements to compute the compensated absence liability. If Joe Johnson’s pay rate is $30 per hour on June 30, 2025, and $35 per hour on June 30, 2026, use $30 per hour for the June 30, 2025, financial statements and $35 per hour for the June 30, 2026, financial statements.
2. Leave that Has Been Used
Report a liability for used leave that has yet to be paid or settled through other means. If thirty people were on vacation the last week of the fiscal year (June 30, 20X5) but the government makes those payments in July, recognize the compensated absence liability for this on June 30, 20X5. Why not accrue such amounts as accrued salaries? Because the liability is related to leave.
Salary-Related Payments
Salary-related payments are additional costs that an employer incurs directly due to the payment of an employee’s salary or wages. These payments are tied to the amount of salary paid to employees and are often mandatory or automatically triggered when salaries are paid.
Examples include the following:
- Social Security
- Medicare taxes
- Defined contribution amounts
Accrue these salary-related amounts (both for unused and used leave) in compensated absences if they are directly and incrementally associated.
Directly means the payment is directly associated with the salary paid.
Incrementally means amounts paid in addition to the salary. In some cases, incrementally associated amounts relate to a portion of the leave. For example, defined contribution payments might be paid for leave used for time off but not for leave related to termination.
Leave – Defined Contribution
Accrue salary-related defined contribution pension and OPEB amounts for unused leave as compensated absences (when they are directly and incrementally associated with leave). Recognize the related expenses as pension expenses or OPEB expenses, as applicable.
Accrue salary-related defined contribution pension and OPEB for used leave as a pension or an OPEB liability, as applicable.
Leave – Defined Benefit
Do not include salary-related payments for defined benefit pensions or defined benefit OPEB when measuring liabilities for compensated absences. Such amounts are recognized in the government’s pension or OPEB liabilities.
The liability for compensated absences concerns only the direct cost of paying employees for leave, not the additional expenses related to the defined benefit pension plan. By keeping these calculations separate, the government avoids double-counting pension-related expenses already accounted for under the pension plan’s liabilities.
Holidays
Do not accrue holidays in compensated absences. (The GASB board says, “The benefit of recognizing them before they are used would be minimal.” So, they chose to provide this exception to the general recognition approach.)
Compensated Absences Notes to Financial Statements
Governments typically disclose beginning debt, increases, decreases, and ending debt in separate columns in the debt disclosure.
Governments can present one of the following for its compensated absence liability:
- Separate increases and decreases
- Net increase or net decrease
If you use a net increase or net decrease, disclose it. GASB 101 says the government “should indicate that it is a net amount.”
Below, I provide examples of compensated absence scenarios.
Paid Time Off (PTO)
Some governmental employees can use PTO for vacation time, sick leave, or other time off. If the PTO accumulates and carries over at the end of the year and the government pays for such unused leave upon termination, recognize a compensated absence liability for such amounts. Why? It accumulates, it’s more likely than not to be paid, and the leave is attributable to services already provided.
Sick Leave
Suppose a government offers sick leave that is earned monthly and carries over at the end of the fiscal year, but they don’t pay for such amounts when the employee terminates. Should the government recognize the sick leave as a compensated absence liability? Yes, but only a portion. Why? The leave accumulates and carries over, but not all amounts will be paid (that is, termination does not trigger a payment)–thus, not all amounts are more likely than not to be used or paid. The government will estimate the amounts more likely than not to be used or paid and will accrue that amount.
In another example, suppose sick leave accumulates monthly, is not paid for upon termination, and does not carry over at the end of a calendar year. If the government has a June 30, 20X5 year-end, should it recognize sick leave for services already rendered as a compensated absence liability? Yes, but only for the amounts likely to be paid by December 31, 20X5. Why? The sick leave accumulates (it carries over from its fiscal year-end of June 30, 20X5) and is for services already provided.
Parental Leave
Suppose a government provides parental leave (e.g., three months off) upon the birth or adoption of a child. Should such amounts be accrued as a compensated absence? Yes, but only when the leave commences. Accrue the entire amount (e.g., three months) as the employee goes on leave.
Effective Date
GASB 101 is effective for fiscal years beginning after December 15, 2023, and all reporting periods after that. Governments can early implement the standard.
Summary
GASB 101, Compensated Absences, updates the recognition and measurement guidance for compensated absences.
Accrue unused and used but not paid or settled compensated absences. Also, include salary-related expenses such as social security.
Accrue compensated absences if:
- The leave is attributable to services already rendered.
- The leave accumulates.
- It is more likely than not to be used or paid.