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: Statement No. 101, Compensated Absences, approved: June 2022.
- Accounting and Financial Reporting Issues
- Project History
- 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
- Deliberations began: February 2020
- Exposure Draft approved: February 2021
- Comment period: March–June 2021
- Redeliberations began: June/July 2021
Compensated Absences—Recent Minutes
Minutes of Meetings, June 1–2, 2022
The Board reviewed a ballot draft of a final statement and voted unanimously to approve the issuance of Statement No. 101, Compensated Absences.
Minutes of Meetings, April 19–21, 2022
The Board reviewed a preballot draft of a final Statement, Compensated Absences, and discussed clarifying edits.
The Board directed the project staff to prepare a preballot draft of a final Statement for discussion at the April 2022 Board meeting.
Next, the Board discussed considerations related to benefits and costs associated with the proposed requirements. The Board tentatively decided that the expected benefits of the requirements proposed for a final Statement justify the perceived costs.
Finally, the Board discussed the characteristics of the accounting and financial reporting information that will result from the provisions of a final Statement. The Board tentatively agreed that the information meets all the characteristics of Group 1 information and, therefore, is within the scope of the GASB’s authority.
The Board directed the project staff to prepare a ballot draft of a final Statement for discussion at the June 1–3, 2022 Board meetings.
Minutes of Meetings, March 8–10, 2022
The Board continued redeliberations by reviewing a draft of the Introduction, Standards, and Effective Date and Transition sections of a final Statement and discussing clarifying edits. Through that discussion, the Board tentatively decided to adjust the effective date requirement to either (1) reporting periods beginning after December 15, 2023 or (2) fiscal years beginning after December 15, 2023 and all reporting periods thereafter. (The Board will decide which of these two effective date requirement options is carried forward to the final Statement after it discusses the GASB’s general approach to establishing effective dates.)
The Board directed the project staff to prepare a preballot draft of a final Statement for discussion at the April 2022 Board meeting.
Minutes of Meetings, December 14–16, 2021
The Board continued redeliberations on the Compensated Absences project by discussing the classification of items included in the measurement of the compensated absences liability. The Board tentatively decided to specify that a compensated absences liability is satisfied when leave is used. The Board also tentatively decided that the nature of each of the types of expense does not change as a result of including them in the compensated absences liability. Lastly, the Board tentatively decided that the disclosure requirements for defined contribution pensions or other postemployment benefits (OPEB) should be clarified to specify the amount of the pension or OPEB liability.
Minutes of Meetings, September 21–23, 2021
The Board began redeliberations on the Compensated Absences project by discussing stakeholder feedback related to the proposed recognition and measurement criteria and note disclosure requirements.
Regarding the proposed criteria on salary-related payments, the Board tentatively decided that guidance related to the directly associated criterion for salary-related payments should not be broadened to include all amounts that have a relationship with salary. The Board then tentatively decided that salary-related payments for defined contribution pension and other postemployment benefits (OPEB) should be recognized when the related leave is earned and reported as part of the compensated absences liability. The Board also tentatively decided that salary-related payments for defined benefit pensions and OPEB should not be recognized in the compensated absences liability. The Board tentatively decided that the guidance in paragraph 19 of the Exposure Draft related to salary-related payments that are incrementally associated only in part should be retained.
With respect to the proposed criteria on sabbatical leave, the Board tentatively decided that no additional clarification should be provided on differentiating restricted and unrestricted sabbatical leave. Next, the Board tentatively agreed that the recognition proposals on sabbatical leave should be retained, and no additional guidance or examples should be included for estimating whether sabbatical leave is more likely than not to be paid.
In regard to financial statements prepared using the current financial resources measurement focus, the Board tentatively decided that the recognition of a compensated absences liability in the governmental funds should be retained as proposed in the Exposure Draft.
For notes to financial statements, the Board tentatively decided to retain the proposal to present either (1) the separate increases or decreases in the compensated absences liability or (2) a net increase or a net decrease in the compensated absences liability, indicating that the amount disclosed is a net amount. The Board also tentatively decided to retain the proposal to not require governments to disclose the governmental fund typically used to liquidate the compensated absences liability. The Board then tentatively decided that no clarification should be provided related to the disclosure of nonrequired information about compensated absences liabilities.
The Board continued redeliberations by discussing stakeholder feedback related to the proposed effective date and transition guidance. The Board tentatively decided to retain the effective date as proposed in the Exposure Draft, which is for reporting periods beginning after December 15, 2022, with earlier application encouraged. The Board also tentatively decided that the transition provisions proposed in the Exposure Draft should be retained in the final Statement.
Lastly, the Board discussed whether exceptions to the general recognition requirements are needed for (1) leave that is dependent upon the occurrence of a sporadic event that affects a relatively small proportion of employees in any particular reporting period, (2) unlimited leave, and (3) holidays. The Board tentatively decided that there should be an exception for each. Based on the Board’s tentative decisions regarding exception (1), it should be worded as follows:
Minutes of Meeting, August 30, 2021
The Board continued redeliberations on the Compensated Absences project by discussing stakeholder feedback related to the proposed flows assumption for the amount due within one year. The Board tentatively decided that no guidance related to the flows assumption should be provided in a final Statement.
Minutes of Meetings, August 10–12, 2021
The Board continued redeliberations on the Compensated Absences project by discussing stakeholder feedback on the Exposure Draft, Compensated Absences, related to the proposed recognition and measurement criteria.
Regarding the proposed recognition criteria of a compensated absences liability, the Board tentatively decided that the optional conversion of leave to defined benefit postemployment benefits should not be addressed further in a final Statement. The Board then tentatively decided that additional authoritative guidance should not be provided for situations in which the leave year and the fiscal year do not align. Next, the Board tentatively decided to establish a practical expedient such that certain types of infrequent leave would not be recognized until the occurrence of a qualifying event. Lastly, the Board tentatively decided that the expected benefits of applying the recognition criteria, including the practical expedient, to all types of leave meeting the definition of a compensated absence justify the perceived costs.
With respect to the probability threshold at which a compensated absences liability should be recognized, the Board tentatively decided that a probability threshold should be included in the guidance and that the threshold more likely than not should be used to recognize a compensated absences liability. Next, the Board tentatively decided that no additional guidance or examples should be added for estimating whether leave is more likely than not to be either paid or settled through other means.
Next, the Board discussed stakeholder feedback on whether vesting should be included as a criterion for recognition. The Board tentatively decided that nonvesting leave meets the conceptual definition of a liability and that vesting should not be a criterion for recognition of a liability for compensated absences.
Lastly, the Board discussed stakeholder feedback related to certain measurement issues. The Board tentatively decided that the following language should be added to a final Statement to address the measurement of a liability related to donated leave pools:
The Board tentatively decided that no additional disclosures should be required related to the assumptions that governments use to identify leave that is more likely than not to be paid at a different rate. The Board also tentatively decided (1) that authoritative guidance should not address the right of offset for negative leave balances and (2) not to provide an exception to the requirements of Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, to separately present and disclose the portion of the compensated absences liability due within one year.
Minutes of Meetings, June 30–July 2, 2021
The Board began redeliberations on the Compensated Absences project by discussing topics related to the scope of the Statement and the definition of a compensated absence.
First, the Board discussed stakeholder feedback related to how certain cash payments by means other than payroll should be addressed in the definition of a compensated absence. The Board tentatively agreed to an amended definition of a compensated absence as follows:
A compensated absence is leave for which employees receive (a) cash payment when the leave is used for time off (b) other cash payment during employment or upon termination of employment, or (c) settlement through noncash means, such as conversion to postemployment benefits.