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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:

1. Cash payments for time off
2. Other cash payments for unused leave upon termination or
3. 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:

1. The leave is attributable to services already rendered.
2. The leave accumulates.
3. It is more likely than not to be used or paid.

Segregation of Duties: How to Overcome

By Charles Hall | Auditing , Fraud

Segregation of duties is key to reducing fraud. But smaller entities may not be able to do so. Today, I tell you how overcome this problem, regardless of the entity’s size.

The Environment of Fraud

Darkness is the environment of wrongdoing.

Why?

No one sees us. Or so we think.

Fraud occurs in darkness.

In J.R.R. Tolkien’s Hobbit stories, Sméagol, a young man murders another to possess a golden ring, beautiful in appearance but destructive in nature. The possession of the ring transforms Sméagol into a hideous creature–Gollum.

And what does this teach us? That which is alluring in the beginning can be destructive in the end.

Fraud opportunities have those same properties: they are alluring and harmful. And, yes, darkness is the environment where fraud happens.

What’s the solution? Transparency. It protects businesses, governments, and nonprofits.

But while we desire open and understandable processes, our businesses often have just a few employees that perform the accounting duties. And, many times, no one else understands how the system works.

It is desirable to divide accounting duties among various employees, so no one person controls the whole process. This division of responsibility creates transparency. How? By providing multiple eyes to see what’s going on.

But this segregation of duties is not always possible.

Lacking Segregation of Duties

Some people says here are three key duties that must always be separated under a good system of internal controls: (1) custody of assets, (2) record keeping or bookkeeping, and (3) authorization. I add a fourth: reconciliation. The normal recommendation for lack of segregation of duties is to separate these four accounting duties to different personnel. But many organizations are unable to do so, usually due to a limited number of employees.

Some small organizations believe they can’t overcome this problem. But is this true? I don’t think so.

Here’s two easy steps to create greater transparency and safety when the separation of accounting duties is not possible.

1. Bank Account Transparency

First, consider this simple control: Provide all bank statements to someone other than the bookkeeper. Allow this second person to receive the bank statements before the bookkeeper. While no silver bullet, it has power.

Persons who might receive the bank statements first (before the bookkeeper) include the following:

• A nonprofit board member
• The mayor of a small city
• The owner of a small business
• The library director
• A church leader

What is the receiver of the bank statements to do? Merely open the bank statements and review the contents for appropriateness (mainly cleared checks).

In many small entities, accounting processes are a mystery to board members or owners. Why? Only one person (the bookkeeper) understands the disbursement process, the recording of journal entries, billing and collections, and payroll.

Relying on a trusted bookkeeper is not a good thing. So how can you shine the light?

Allow a second person to see the bank statements.

Fraud decreases when the bookkeeper knows someone is watching. Suppose the bookkeeper desires to write a check to himself but realizes that a board member will see the cleared check. Is this a deterrent? You bet.

Don’t want to send the bank statements to a second person? Request that the bank provide read-only online access to the second person. And let the bookkeeper know.

Even the appearance of transparency creates (at least some) safety. Suppose the second person reviewer opens the bank statements (before providing them to the bookkeeper) and does nothing else. The perception of a review enhances safety. I am not recommending that the review not be performed. But if the bookkeeper even thinks someone is watching, fraud will lessen.

When you audit cash, see if these types of controls are in place.

Now, let’s look at the second step to overcome a lack of segregation of duties. Surprise audits.

2. Surprise Audits

Another way to create small-entity transparency is to perform surprise audits. These reviews are not opinion audits (such as those issued by CPAs). They involve random inspections of various areas such as viewing all checks clearing the May bank statement. Such a review can be contracted out to a CPA. Or they can be performed by someone in the company. For example, a board member.

Additionally, adopt a written policy stating that the surprise inspections will occur once or twice a year.

The policy could be as simple as:

Twice a year a board member (or designee other than the bookkeeper) will inspect the accounting system and related documents. The scope and details of the inspection will be at the judgment of the board member (or designee). An inspection report will be provided to the board.

Why word the policy this way? You want to make the system general enough that the bookkeeper has no idea what will be examined but distinct enough that a regular review occurs. 

Surprise Audit Ideas

Here are some surprise audit ideas:

• Inspect all cleared checks that clear a particular month for appropriate payees and signatures and endorsements
• Agree all receipts to the deposit slip for three different time periods
• Review all journal entries made in a two week period and request an explanation for each
• Inspect two bank reconciliations for appropriateness
• Review one monthly budget to actual report (look for unusual variances)
• Request a report of all new vendors added in the last six months and review for appropriateness

The reviewer may not perform all of the procedures and can perform just one. What is done is not as important as the fact that something is done. In other words, the primary purpose of the surprise audit is to make the bookkeeper think twice about whether he or she can steal and not get caught.

I will say it again. Having multiple people involved reduces the threat of fraud.

Segregation of Duties Summary

In summary, the beauty of these two procedures (bank account transparency and surprise audits) is they are straightforward and cheap to implement. Even so, they are powerful. So shine the light.

What other procedures do you recommend?

For more information about preventing fraud, check out my book: The Little Book of Local Government Fraud Prevention.

Rita Crundwell Story: Why Some Ranches Stink

By Charles Hall | Asset Misappropriation

Is it possible for one person to steal over $53 million from a city with an annual budget of less than $10 million? Yes. The Rita Crundwell story provides a cautionary tale for small businesses, governments, and nonprofits.

The Rita Crundwell Theft

Rita Crundwell, comptroller, and treasurer of Dixon, Illinois stole $53 million over a twenty-year period. The city of 16,000 residents held Crundwell in high esteem. One friend described her as “sweet as pie.” Another said: “You could not find a nicer person.”

So why did she steal? It appears Rita just enjoyed the good life. She used the money to fund one of the top quarter horse ranches in the country, and she did it with style: Some of the funds were used to purchase over $300,000 of jewelry and a $2.1 million motor coach vehicle.

Her annual salary? $80,000.

The city’s annual budget? $6 to $8 million

Were yearly audits performed? Yes.

Were budgets approved? Yes.

But even with budgets and audits, the Dixon, Illinois scandal happened. 

Too Much Trust

So how did this happen? Rita Crundwell won the trust of those around her—especially that of mayor and council. In April 2011, finance commissioner and veteran council member, Roy Bridgeman, praised Crundwell calling her “a big asset to the city as she looks after every tax dollar as if it were her own.” Too much trust in a bookkeeper can lead to huge problems. 

It was a disturbing moment when Dixon Mayor James Burke presented the FBI with evidence of Crundwell’s fraud. Burke later recalled his emotions and words: “I literally became sick to my stomach, and I told him that I hoped my suspicions were all wrong.” Such a response is understandable given that Crundwell had worked for the city for decades. She had fooled everyone.

Secret Bank Account

According to the mayor, the city’s annual audits raised no red flags, and the city’s primary bank never reported anything suspicious. So how did she steal the money? In 1990, Crundwell opened a secret bank account in the name of the city (titled the RSDCA account: the initials stood for reserve sewer development construction account). Crundwell was the only authorized check signer for the account, and the RSDCA bank account was never set up on the city’s general ledger. The City’s records reflected none of the RSDCA deposits or disbursements.

Crundwell would write and sign manual checks from a legitimate city capital project fund checking account, completing the check payee line with “Treasurer.” (Yes, Crundwell had the authority to issue checks with just her signature—even for legitimate city bank accounts.) She would then deposit the check into her secret account. From the bank’s perspective, a transfer had been made from one city bank account to another (from the capital projects fund to the reserve sewer development construction fund).

Accounting Cover-up

While the capital project fund disbursement was recorded on the city’s books, the RSDCA deposit was not. A capital project fund journal entry was made for each check debiting capital outlay expense and crediting cash. But no entry was made to the city’s records for the deposit to the RSDCA account. Once the money was in the RSDCA account, Crundwell wrote checks for personal expenses—and she did so for over twenty years.

To complete her deceit, Crundwell provided auditors with fictitious invoices from the Illinois Department of Transportation; these invoices included the following notation: Please make checks payable to Treasurer, State of Illinois. (So the canceled checks made out to Treasurer agreed with directions on the invoice, but the words “State of Illinois” were conveniently left off the check payee line.) Remember Crundwell was the treasurer of Dixon. 

Those invoices and the related checks were often for round dollar amounts (e.g., $250,000) and most were for more than $100,000. In one year alone, Crundwell embezzled over $5 million.

Vacation Leads to Arrest

So how was she caught? While Rita was on an extended vacation for horse shows, the city hired a replacement for her. For some reason, Crundwell’s substitute requested all bank account statements from the city’s bank. As the bank statements were reviewed, the secret bank account was discovered. And soon after that, the mayor contacted the FBI.

The Control Weakness

Why was Rita Crundwell able to steal $53 million? Wait for it. A lack of segregation of duties.

Rita could:

• Write checks
• Approve payments
• Create and monitor the budget
• Enter transactions into the accounting system
• Reconcile the bank statements

The Accounting Fix

Multiple people should perform accounting duties, not just one.

Moreover, accounting employees should annually take a one-week vacation (or longer). And while they are gone, someone else should perform the vacant person’s duties. The vacation itself is not the key to this control. The performance of the absent accountant’s duties is. Why? Doing so allows the replacement person to understand the work of the vacant employee. But, more importantly, the substitute can note any unusual or fraudulent activity.

Here’s another action to take: Periodically contact your organization’s bank and ask for a list of all bank accounts. Then compare the list to the bank accounts in your general ledger. If a bank account is not on the general ledger, see why. And request a copy of the related signature card from the bank.

What Happened to Rita Crundwell?

So, what happened to Rita? She was sentenced to 19.5 years in prison. Here are pictures from the Chicago Tribune that shed light on the fraud.

All the Queens Horses

Kelly Richmond Pope has masterfully captured the Rita Crundwell tale in the movie All the Queen’s Horses, available on Amazon. Think auditing is boring? Then watch the movie. It does a better job of explaining the psychological and financial damage of fraud than any textbook. 

GASB 87 Lease Accounting

By Charles Hall | Accounting , Local Governments

Government Auditing Standards: 2018

By Charles Hall | Auditing , Local Governments