Compensated Absences—Reexamination of Statement 16
Research Description: The objective of this project is to address certain issues related to accounting and financial reporting for compensated absences. The project will consider improvements to the existing guidance in Statement No. 16, Accounting for Compensated Absences, related to: (1) addressing certain types of accrued leave benefits that are not covered in Statement 16, (2) measurement options for sick leave, and (3) the usefulness of required notes to financial statements for decision-making and assessing accountability.
Added to Agenda: December 2019
- Accounting and Financial Reporting Issues
- Project History
- Current Developments
- Work Plan
- Recent Minutes
- Minutes Archive
- Tentative Board Decisions to Date
- Project staff:
Compensated Absences—Project Plan
Background: Governments typically provide paid leave benefits to their employees, such as vacation leave and sick leave. Often, those benefits accumulate and employees are paid for some or all of their unpaid leave when they terminate employment. Statement 16 defined compensated absences in paragraph 1 as “absences for which employees will be paid, such as vacation, sick leave, and sabbatical leave.” In addition, pre-agenda research indicated some governments provide paid time off (PTO) and compensatory time off.
Many governments allow employees to carry over some or all of their accrued leave balance at the end of a fiscal year. Some governments have different policies for different types of leave, such as paying out accrued vacation leave but not accrued sick leave at termination of employment. Some governments have different policies for different classes of employees, such as general employees and uniformed employees.
Statement 16 required that governments generally recognize a liability for compensated absences because employees are entitled to time off or a cash payment in exchange for services already rendered at the financial statement date. Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, included compensated absences as an example of a long-term liability.
The pre-agenda research conducted for this project identified several issues with the existing standards, including a lack of guidance for certain types of leave, inconsistent application of those standards, and changes in the conceptual framework since the issuance of those standards.
Statement 16 distinguished between different types of paid leave, providing different guidance for vacation leave and sick leave. Although many governments continue to provide those benefits separately, the use of PTO has become more common since Statement 16 was issued. With PTO, employees may use their accrued hours of paid leave for either vacation or sick time. Therefore, the distinction between vacation and sick leave in Statement 16 does not apply when governments provide PTO. Some respondents to the preparer surveys in the pre-agenda research indicated that providing guidance specific to PTO would be beneficial. Additionally, a Governmental Accounting Standards Advisory Council (GASAC) member raised the question of whether compensatory time should be accrued as a compensated absence. Compensatory time is when an employee receives additional time off in lieu of overtime pay.
The pre-agenda research indicated there may be inconsistent application of the guidance in Statements 16 and 34 for compensated absences, specifically in the areas of sick leave accrual methods and disclosures of changes in long-term liabilities and the amount due within one year. Statement 16 allows for governments to choose one of two methods for accruing a liability for sick leave: termination payment method or vesting method. Seventeen percent of the respondents to the preparer survey indicated using a method other than those two.
Statement 34 requires compensated absences to be included in the disclosures of long-term liabilities. Those disclosures include increases and decreases during the year (separately presented) and the portion that is due within one year. The staff’s archival analysis found that 24 percent of governments in the random sample showed only a net increase or decrease in the compensated absences liability instead of gross increases and decreases as required. The Government Finance Officers Association (GFOA) also recently identified this issue as one of the top 50 deficiencies in financial statements submitted to its Certificate of Achievement for Excellence in Financial Reporting (Certificate) program. The archival analysis also found that 12 percent of governments in the sample reported the entire compensated absences balance as due within one year and 10 percent reported the entire balance as due in more than one year. That may be appropriate in some cases, depending on the government’s policies for carrying over accumulated leave balances and assumptions with respect to the pattern of usage. The GFOA previously identified incorrectly classifying the entire balance as a current liability as a common deficiency found through its Certificate program.
Statement 16 was issued in 1992. Since then, the GASB has addressed note disclosures in Concepts Statement No. 3, Communication Methods in General Purpose Financial Reports That Contain Basic Financial Statements. According to Concepts Statement 3, note disclosures provide information essential to a financial statement user’s understanding of a government’s financial statements. One reason that information may be disclosed in notes is that it provides additional insight into financial position and inflows or outflows of resources but does not meet the criteria for recognition (paragraph 35). The GASB also has addressed the definition of liabilities since the issuance of Statement 16. Concepts Statement No. 4, Elements of Financial Statements, was issued in 2007. Liabilities are defined in Concepts Statement 4 as “present obligations to sacrifice resources that the government has little or no discretion to avoid.” The provisions in Statement 16 have not been evaluated in light of the conceptual framework with regard to (1) what should be the required note disclosures, if any, and (2) whether and when compensated absences should be reported as a liability.
Accounting and Financial Reporting Issues. The following issues will be considered:
- When should a liability be recognized for various types of leave?
- How should the compensated absences liability be measured? Should governments continue to have an option for the method of measuring accrued sick leave?
- Should guidance be provided on how to determine the portion of the liability that is due within one year?
- What disclosures about compensated absences should be required?
- Pre-agenda research approved: August 2018
- Consultative group appointed? No
- Research results reported to the Board: November 2019
- Proposed for addition to current technical agenda: December 2019
Topics to Be Considered
|February 2020:||Recognition for various types of leave.|
||Conduct survey of users on existing and potential disclosures.|
|March–May 2020:||Measurement of a liability.|
|June–September 2020:||Conduct additional user research on existing and potential disclosures.|
|October 2020:||Disclosures (continued).|
|December 2020:||Review first draft of a standards section of an Exposure Draft; cost-benefit considerations.|
|January 2021:||Review preballot draft of an Exposure Draft of a proposed Statement.|
|February 2021 (T/C):||Review ballot draft of an Exposure Draft of a proposed Statement and consider for approval.|
|February–April 2021:||Comment period.|
|September 2021:||Review preballot draft of a final Statement.|
|October 2021 (T/C):||Review ballot draft of a final Statement and consider for approval.|