The Governmental Accounting Standards Board (GASB) Statement 101, Compensated Absences is effective for fiscal years beginning after December 15, 2023, and is applicable to all state and local governments, including public utilities that follow GASB standards. The statement doesn’t apply to utility cooperatives or other entities that follow the Financial Accounting Standards Board (FASB) standards.

It aims to provide clarity to financial statement readers by offering updated guidance on the recognition and measurement of compensated absences and associated salary-related payments.

Under GASB Statement 101, a liability must be recognized for either:

• Leave that hasn’t been used
• Leave that has been used but not yet paid in cash or settled through noncash means

To implement this effectively, it’s important to understand the definition of compensated absences as outlined by the statement.

GASB 101 defines compensated absence as any 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
• Noncash settlements, such as conversion to post-employment benefits

Common forms of compensated absences include vacation, sick leave, paid time off, holidays, parental leave, bereavement leave, and sabbaticals.

Adoption Best Practices

With GASB Statement 101 becoming effective for all utilities starting with the December 31, 2024, fiscal year-end, now is the time to review the various leave policies in place to determine the recognition and measurement impacts from the new guidance. Understanding the nuances of different leave policies for administrative employees versus collective bargaining employees may also be required to ensure the leave is appropriately identified and recorded in line with GASB Statement 101.

Recognition and Measurement

The recognition of compensated absences liabilities should be leave that hasn’t been used and leave that has been used but not yet paid or settled.

When assessing leave that hasn’t been used, all three of the following must be true in order to recognize a liability:

• The leave is attributable to services already rendered
• The leave accumulates, as in it’s carried forward from one reporting period in which it’s earned to a future reporting period
• The leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means

As part of management’s evaluations on whether a leave is more likely than not to be used, the following additional factors must be considered as outlined by the statement:

• The government’s employment policies related to compensated absences
• Whether leave that has been earned is, or will become, eligible for use or payment in the future
• Historical information about the use, payment, or forfeiture of compensated absences
• Information known to the government that would indicate that historical information may not be representative of future trends or patterns

It’s important to note that when measuring the liability for leave that hasn’t been used, an employee’s pay rate as of the date of the financial statements should generally be used. For leave that has been used but not yet paid or settled, the liability should be measured at the amount of the actual cash payment.

Exceptions for Certain Types of Leave

GASB Statement 101 provided several exceptions for leave that could be difficult for local governments and public utilities to anticipate and quantify given the sporadic nature of when the leave may occur.

The GASB specifically outlined military, parental, and jury duty leave, noting that recognition for these types of leave should not occur until the leave commences. Employers that offer unlimited paid time off—leave without specific limits—were also included as an exception.

For holidays that are taken on a specific date, excluding floating holidays used at the employee’s discretion, the GASB ultimately determined that the impact of recognition would not be considered material by the financial statement reader.

One of the unique definitions established by GASB Statement 101 includes clarification on sabbatical leave. A distinction is made between unrestricted sabbatical leave and other sabbatical leave.

An unrestricted sabbatical is a period of time off during which an employee is not required to perform any significant duties and should be recognized as a compensated absence. In contrast, sabbatical leave that requires an employee to perform duties for the employer, such as research, should not be considered a compensated absence and should be excluded.

Notable Changes within GASB Statement 101

The discussion thus far may seem similar to existing guidance under GASB Statement 16; however, there are some key differences to address, particularly related to sick leave and other forms of leave that may not require cash payments upon employee termination.

As part of the adoption of Statement 101, an employer must record a liability when the employee earns the time off and when the employee is more likely than not to use the benefit.

In that case, although sick leave may not be required to be paid to the employee upon termination, a portion of the sick leave may be more likely than not to use the accrued sick leave during employment.

With this determination, it is important to consider whether the government allows carryover of sick hours to the following year, and what the likelihood is that an employee will use the accrued leave prior to termination. This will require management to estimate the amount of accrued sick leave, or similar types of leave, that is more likely than not to be utilized in future years.

Under previous guidance with GASB Statement 16, many employers with sick leave that was not required to be paid out to the employee upon termination concluded that no liability should be recorded at the fiscal year-end. With the provisions of GASB Statement 101, this will change as management may determine that a certain amount of accrued sick leave is more likely than not to be utilized by the employee prior to termination, so an accrual could be likely at the fiscal year-end. This will also need to be measured utilizing the employee’s pay rate at fiscal year-end, rather than the pay rate on the date the employee actually earned the leave.

We’re Here to Help

For more information on GASB 101 implementation contact your Moss Adams professional.

Additional Resources

• Power & Utilities Practice
• Financial Statement Audit Services