Project Pages

Compensated Absences—Reexamination of Statement 16

Project 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.

Status: Initial Deliberations

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?

Project History:

  • 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
  • Deliberations began: February 2020
Current Developments: In May 2020, the Board considered topics related to measurement of a liability. A survey of financial statement users regarding the importance to them of information about compensated absences was concluded in June. The Board held initial discussions on the topic of disclosures in July 2020.

Work Plan:
 

Board Meetings

Topics to Be Considered

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.
May–August 2021: Redeliberations.
September 2021: Review preballot draft of a final Statement.
October 2021 (T/C): Review ballot draft of a final Statement and consider for approval.

Compensated Absences—Recent Minutes


Minutes of Videoconference, October 29, 2020
 
The Board began deliberations on the Compensated Absences project by discussing an overview of the processes used to conduct the user interviews. Then the Board discussed existing note disclosure requirements for compensated absences in light of the feedback received from those interviews. The Board tentatively agreed to retain the requirement to disclose the beginning and ending balances of the compensated absences liability. The Board then tentatively decided to propose providing an exception to paragraph 119b of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, such that governments only would be required to disclose the net change in the compensated absences liability for the reporting period (and would indicate such net disclosure). The Board also tentatively agreed to propose providing an exception to paragraph 119d of Statement 34 such that governments would not be required to disclose the governmental funds that typically have been used to liquidate the compensated absences liability.

The Board then considered issues related to the presentation and disclosure of the portion of the compensated absences liability that is due within one year of the statement date. The Board tentatively agreed to retain the requirements to present and disclose the amount of the compensated absences liability that is due within one year. The Board then discussed guidance related to the estimation of the portion of the compensated absences liability that is due within one year. The Board tentatively agreed to retain Question 7.22.4 of Implementation Guide No. 2015-1 and tentatively determined that additional guidance for estimating the amount due within one year should not be provided. Next, the Board discussed issues related to the flows assumption used to estimate the amount due within one year. The Board tentatively decided that a specific flows assumption should not be proposed. The Board then tentatively decided to propose that a default flows assumption be provided for governments that do not have an employment policy that determines the assumption. The Board further tentatively decided to propose that the default flows assumption provided be first-in-first-out. The Board also tentatively decided to propose that governments disclose the flows assumption that they use.

Next, the Board discussed potential additional disclosures related to compensated absences. The Board began this discussion by considering the disclosure of employment policies related to compensated absences and tentatively agreed that this disclosure should not be proposed. The Board also considered the disclosure of a measure of the closeness of a government’s workforce to retirement. The Board tentatively agreed that the closeness of the workforce to retirement should not be proposed to be disclosed. The Board considered other suggested disclosures that were raised during the user interviews and tentatively agreed that none of those additional disclosures should be proposed for compensated absences.

Finally, the Board discussed considerations related to the benefits and costs of the tentative decisions reached related to note disclosures. The Board tentatively decided that the expected benefits of the proposed note disclosure requirements justify the perceived costs of implementation and ongoing compliance.

Minutes of Videoconference, July 29, 2020
 
The purpose of the Board deliberations at this meeting was to determine which disclosure items should be explored further in interviews with financial statement users. The Board began deliberations by discussing the current note disclosure requirements for long-term liabilities, including the compensated absences liability, as found in paragraph 119 of Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, including (a) the beginning and ending balances of the liability, (b) increases and decreases in the liability, (c) the portion of the liability that is due within one year, and (d) the governmental fund(s) that historically have been used to liquidate the liability. The Board tentatively agreed that exceptions to those disclosure requirements for the compensated absences liability should be considered further in this project.
 
Next, the Board discussed the disclosure of employment policies related to compensated absences, which is a common voluntary disclosure. The Board tentatively agreed that the disclosure of employment policies regarding leave time should be considered further in this project.
 
The Board discussed potential note disclosures related to compensated absences associated with (a) the flows assumption (FIFO/LIFO) used to estimate the current portion of the compensated absences liability and (b) closeness of the workforce to retirement and tentatively agreed that these potential note disclosures should be considered further in this project. The Board also considered other potential note disclosures, such as (1) an estimated payment schedule, (2) disaggregation of additions and reductions by reason, (3) disaggregation of ending balance by type of leave, (4) disaggregation of ending balance by salary levels, and (5) utilization rates. The Board tentatively decided, however, that those potential disclosures should not be considered further in this project.

Minutes of Meetings, May 6–8, 2020

The Board began deliberations by discussing the general approach to measuring the compensated absences liability. The Board tentatively agreed that the measurement of the compensated absences liability should include absences that will be used as time off in future periods in addition to absences that will be paid out upon termination.
 
Next, the Board discussed issues related to the hours that should be included in the measurement of the compensated absences liability. The Board tentatively decided to propose that only hours that are more likely than not to be paid, either through payroll as paid time off or as a cash payment upon termination, should be included in the measurement. The Board also tentatively agreed to propose that, when a government pays out a percentage of the hours accumulated at termination, the government apply that percentage only to the estimated portion of the accumulated hours that will be paid out at termination. The Board then discussed whether specific guidance should be provided for estimating the amounts of leave that will be paid (either through time off or at termination). The Board tentatively decided to propose guidance in the form of factors to consider, such as historical information regarding the payment, usage, and forfeiture of accumulated leave as well as current and future employee eligibility when estimating the amount of leave that is more likely than not to be paid. The Board also tentatively decided not to propose a specific flow assumption (for example, last in-first out).
 
The Board then discussed accumulated leave that can be used as a retirement benefit. This includes: (a) accumulated leave that can be deposited into an account, which can be used to pay healthcare premiums or claims, and (b) accumulated leave that can be converted and factored into the formula that determines an employee’s pension or other post-employment benefit (OPEB) in a defined benefit plan. The Board tentatively decided to propose that accumulated leave that will be paid to a healthcare account be measured in the same manner as leave that will be paid to an employee. Furthermore, the Board tentatively agreed to propose that accumulated leave that will be factored into the benefit formula to determine pension or OPEB payments be excluded from the compensated absences liability.
 
Next, the Board discussed issues related to the pay rate to be used in the measurement of the compensated absences liability. The Board tentatively agreed to propose that the current pay rate at fiscal year-end be used to calculate the compensated absences liability. The Board also tentatively agreed to propose that in instances in which a government pays out a rate other than the salary pay rate at termination, the government apply that rate only to the estimated portion of the leave that will be paid out at termination. The Board also tentatively decided that the compensated absences liability should not be measured at present value.
 
The Board also discussed other measurement issues, and tentatively decided to propose that the general measurement guidance for unrestricted sabbatical leave from Statement No. 16, Accounting for Compensate Absences, be retained. The Board also tentatively decided to not address the following issues as a part of this project: (1) insurance for compensated absences, (2) the applicability of fiduciary activity guidance, (3) the right to offset the compensated absences liability against any assets designated to prefund compensated absences, and (4) the recognition of the compensated absences liability in internal service funds.
 
Lastly, the Board discussed salary-related payments associated with compensated absences. The Board discussed whether specific guidance on salary-related payments should be included in the measurement guidance for the compensated absences liability, and tentatively decided it should be. The Board tentatively agreed that salary-related payments should be accrued for all leave for which a compensated absences liability is recognized. The Board also tentatively decided to propose a general definition of includable salary-related payments as “items for which the payment of the salary-related item is directly and incrementally associated with payments made for compensated absences.” The Board then applied the definition of includable salary-related payments to various types of fringe benefits and tentatively agreed with the application. The Board also tentatively agreed to propose that the salary-related payments portion of the compensated absences liability be calculated using the current rate at fiscal year-end.

Minutes of Meetings, March 24–26, 2020

The Board began deliberations by discussing criteria for recognition of compensated absences in the financial statements using the economic resources measurement focus. First, the Board discussed the recognition criteria for compensated absences that are not contingent on a specific event according to Statement No. 16, Compensated Absences (vacation leave and similar leave). The Board tentatively decided to propose that the recognition model include the following criteria: (a) the compensated absence is attributable to services already rendered and (b) the compensated absence accumulates. The Board also tentatively decided not to propose that (1) payments are probable and (2) the amount can be reasonably estimated as recognition criteria. Those potential criteria again will be considered during the Board’s assessment of the measurement criteria proposals at a future meeting.
 
The Board then discussed other types of leave that are contingent according to Statement 16 (sick leave and similar leave). The Board tentatively decided a government becomes obligated for sick leave and similar leave when an employee earns the time off and the sick leave hours are made available to use. Therefore, the Board tentatively decided that sick leave and similar leave should follow the recognition model previously described.
 
Next, the Board discussed unrestricted and restricted sabbatical leave. The Board tentatively agreed that restricted sabbatical leave does not meet the Board’s tentative definition of a compensated absence. In addition, the Board also tentatively decided that unrestricted sabbatical meets the tentative definition of a compensated absence. Therefore, the Board tentatively decided to propose that unrestricted sabbatical leave follow the recognition model previously discussed. Additionally, the Board tentatively decided to propose specific guidance on the application of the accumulating criterion to unrestricted sabbatical leave.
 
The Board then discussed the application of the recognition criteria to various types of compensated absences. The Board tentatively agreed with the application of the recognition model to various types of compensated absences, with certain clarifications.
 
Finally, the Board discussed the recognition of compensated absences in governmental funds. The Board tentatively decided to propose carrying forward the existing guidance in Statement 16 and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, for recognition of compensated absences in the governmental funds using the current financial resources measurement focus.

Minutes of Meetings, February 11–13, 2020
 
The Board began deliberations by discussing the definition of compensated absences.  The Board tentatively decided to propose amending the definition of compensated absences as follows:
 
Leave for which employees are expected to be paid, either through paid time off or cash payment upon termination of employment, or settled through some other means such as conversion to pension or other postemployment benefits.

Examples of compensated absences include vacation, sick leave, paid time off, and sabbatical leave.
 
The Board then discussed whether the Compensated Absences project should specifically address the accounting for certain types of leave, other than vacation leave and sick leave, that may be common enough for specific mention or may warrant additional guidance. The Board tentatively decided that the project should specifically address the following:
  • Combined paid time off (PTO)
  • Accrued compensatory time
  • PTO without specific limits
  • Sabbatical leave
  • Military leave.

Compensated Absences—Tentative Board Decisions to Date


The Board tentatively decided to propose the following:
  • Compensated absences should be defined as:
Leave for which employees are expected to be paid, either through paid time off or cash payment upon termination of employment, or settled through some other means such as conversion to pension or other postemployment benefits.

Examples of compensated absences include vacation, sick leave, paid time off, and sabbatical leave.
  • The Compensated Absences project should specifically address the accounting for the following types of leave in addition to vacation leave and sick leave:
    • Combined paid time off (PTO)
    • Accrued compensatory time
    • PTO without specific limits
    • Sabbatical leave
    • Military leave.
  • A compensated absence, including sick leave, should meet the following recognition criteria in order to be recognized as a liability in the financial statements using the economic resources measurement focus:
    • The compensated absence is attributable to services already rendered.
    • The compensated absence accumulates.
  • A government becomes obligated to pay for sick leave and similar leave when an employee earns the time off and the sick leave hours are made available to use.
  • Restricted sabbatical leave does not meet the tentative definition of a compensated absence.
  • Unrestricted sabbatical does meet the tentative definition of a compensated absence and should follow the tentative recognition criteria.
  • Compensated absences should be recognized in the governmental funds using existing guidance, as described in Statement No. 16, Compensated Absences, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.
  • A liability should be recognized for absences that will be used as paid leave in future periods as well as absences that will be paid out at termination.
  • Only hours that are more likely than not to be paid, either through payroll as paid time off or cash payment upon termination, should be included in the measurement of the compensated absences liability.
  • In instances in which a government pays a percentage of the hours accumulated at termination of employment, the government should apply the payout percentage only to the estimated portion of the accumulated hours that will be paid out at termination.
  • Governments should consider factors, such as historical information and current and future eligibility, when assessing whether amounts of leave are more likely than not to be paid.
  • Accumulated leave that will be paid to a healthcare account should be included in the measurement of the compensated absences liability.
  • Accumulated leave that will be factored into the benefit formula to determine pension or OPEB payments should be excluded from the measurement of the compensated absences liability.
  • Current pay rate at fiscal year-end should be used to calculate the compensated absences liability.
  • In instances in which a government pays out at a rate other than the current pay rate at fiscal year-end, the government should apply the payout rate only to the estimated portion of leave that will be paid out at termination.
  • Compensated absences liabilities should not be measured at present value.
  • General measurement guidance for unrestricted sabbatical leave in Statement 16 should be carried forward.
  • Salary-related payments should be accrued for all leave for which a compensated absences liability is recognized.
  • Includable salary-related payments should be defined as, “items for which the payment of the salary-related item is directly and incrementally associated with payments made for compensated absences.”
  • Salary-related payments portion of the compensated absences liability should be calculated using the current rate at fiscal year-end.
  • An exception to paragraph 119(b) of Statement No. 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, should be provided, such that governments would only be required to disclose the net change in the compensated absences liability for the reporting period (and would indicate such net disclosure).
  • An exception to paragraph 119(d) of Statement 34 should be provided, such that governments would not be required to disclose the governmental funds that typically have been used to liquidate the compensated absences liability.
  • A default flows assumption for the estimation of the amount due within one year should be provided for governments that do not have an employment policy that determines the assumption.
  • The default flows assumption for the estimation of the amount due within one year should be first-in-first-out.
  • The flows assumption that is used in estimating the amount due within one year should be disclosed.