With the first quarter of 2025 coming to a close, if you haven’t already considered the new accounting pronouncements, you need to get moving. Starting for fiscal years beginning after December 15, 2024, the Governmental Accounting Standards Board (“GASB”) issued Statement No. 101, Compensated Absences replacing Statement No. 16, Accounting for Compensated Absences.

GASB 101 updates the guidance regarding the recognition of compensated absences for governmental entities. We will walk through key aspects of this new pronouncement below, but the most common impact for your governmental organization will be around sick leave.

What is a compensated absence?

A compensated absence is leave for which employees may receive one or more of the following:

  1. Cash payments when the leave is used for time off
  2. Other cash payments, such as payment for unused leave upon termination of employment
  3. Noncash settlements, such as conversion to defined benefit postemployment benefits

Compensated absences generally do not have a set payment schedule. Examples of compensated absences include vacation leave, sick leave, PTO, holidays (holiday leave that is taken on a specific date not at the discretion of the employee does not need to be included), paternity leave, bereavement leave and certain types of sabbatical leave.

What should an organization do to adopt this standard?

The first thing accounting teams should do is meet with your human resources team to discuss and document all types of leave that your organization offers.

For recognition purposes, all three of the following must be present:

  1. The leave is attributable to services already rendered.
  2. The leave accumulates (can be rolled forward from reporting period when earned to a future reporting period when is will be paid, settled or used).
  3. The leave is more likely than not (>50% chance) to be used for time off or otherwise paid in cash or settled through noncash means.

Companies must recognize a liability for leave that has been used but not paid or settled and leave that has not been used.

Applicable salary related payments, liabilities that a government incurs related to providing the leave in exchange for services, should be included in the liability determination. Examples of salary related payments include the employer share of FICA and other employer payroll tax obligations.

When a compensated absence is dependent upon the occurrence of a sporadic event (parental leave, jury duty, military leave, etc.), a liability is not recorded until the leave begins.

For unlimited paid time off, no expense should be recognized until time off is used.

How to determine if leave is more likely than not to be used?

Governmental organizations will need to consider historical information about the use and payment of compensated absences. Including more historical periods in this analysis will reduce potential outliers. You will also need to consider anomalous patterns that would indicate the historical information may not be representative of future expectations.

So how does this impact sick leave?

In summary, an employer must record a liability when an employee earns time off and is more likely than not to use it. In this example, although sick leave may not be paid out upon termination, a portion of this leave could be determined to be more likely than not to be used before termination.

An important consideration is the respective employee’s pay rate at the end of the fiscal year will need to be used for determining the accrual, as opposed to the pay rate when an employee earns the leave.

Disclosure and effective date:

Within the financial statements, entities have the option to disclose only the net annual change in the liability for compensated absences, rather than disclosing the gross annual increases and decreases separately. If material, financial statements must disclose information about compensated absences, including leave types and key assumptions.

Need help implementing GASB 101?

As with most new accounting pronouncements, your implementation of GASB 101 may have complexities. Your questions are important to us at LBMC, and we are committed to providing the guidance and support you need to successfully implement GASB 101.

Contact us today to ensure a smooth transition and compliance with GASB 101.

Content provided by Kurt Zollner, Senior Manager, LBMC Audit Services.

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