The Governmental Accounting Standards Board released new guidance Wednesday to provide an unified accounting treatment for compensated absences of state and local government employees and simplify the disclosure work.
The guidance in Statement No. 101, Compensated Absences, supersedes the earlier guidance from 1992 in Statement No. 16, Accounting for Compensated Absences, and comes in response to GASB’s efforts to periodically re-examine its older standards to make sure they remain effective. their continued effectiveness. The new guidance aims to improve the recognition and measurement requirements for compensated absences and refines the related disclosure requirements.
State and local governments frequently provide paid leave benefits to their workers in the form of vacation leave and sick leave. But some of those benefits have changed a lot since 1992, such as the use of a paid-time-off model that has characteristics of both vacation and sick leave. Statement 101 aligns recognition and measurement guidance for all types of compensated absences under an unified model.
GASB’s hope is the new model that will enable governments to recognize a liability that more appropriately reflects when they incur an obligation for compensated absences. The model also should produce more consistency in application and greater comparability across governments.
Statement 101 explains the circumstances under which governments will need to recognize a liability for compensated absences and offers guidance for measuring that liability. The general approach for measurement is to use an employee’s pay rate as of the financial reporting date.
Generally, a liability for leave that has not been used would be recognized if the leave:
(a) Is attributable to services already rendered;
(b) Accumulates; and
(c) Is more likely than not to be used for time off or otherwise paid or settled.
There are some exceptions, however, such as with parental leave and military leave, for which a liability wouldn’t be recognized until the leave begins.
The guidance gets rid of some of the current disclosure requirements that GASB research found didn’t provide essential information to users of financial statements, or at least makes them optional. The standard offers an alternative to the existing requirement to disclose the gross annual increases and decreases in long-term liability for compensated absences, permitting governments to disclose only the net annual change in the liability as long as it is identified that way. Statement 101 also removes a disclosure requirement for government funds used to liquidate the liability for compensated absences.
“We undertook the project to try to modernize that literature because GASB 16, which is the current guidance for compensated absences, came out a long time ago, and those types of benefits have evolved,” GASB chairman Joel Black told Accounting Today in an interview in May (see story). “When we issued that, the guidance talks about a difference between vacation leave and sick leave. Now a lot of organizations and governments have PTO, which is a combination of those. So how does PTO time work in a comparable way, accounting wise, to a government that might still have vacation and sick [days], versus a government that just has a PTO that combines them? We wanted to relook at that literature and try to modernize it, and make sure that for all the current ways in which those benefits are provided, the accounting allows for that and can result in consistent guidance.”
The requirements of Statement 101 take effect for fiscal years starting after Dec. 15, 2023, and all reporting periods after that, but GASB is encouraging state and local governments to apply the guidance sooner.