A new accounting principle is now in place for public sector entities that pay out work-related absences like sick leave and PTO. For many, the new rule will change the face of their financials and disclosures, and it may require some to issue restatements. What will your entity need to do to comply?

What changed in GASB 101?

The new rule, Statement No. 101, Compensated Absences (GASB 101), supersedes Statement No. 16, Accounting for Compensated Absences (GASB 16). The most notable departure from prior guidelines is how to record sick leave.

Sick leave is a unique type of paid leave. In many businesses, sick leave is only awarded when an employee reports an illness. This differs from other types of leave, like PTO or a sabbatical, that are earned over time. Previously, GASB 16 used a rules-based approach to recording compensated absences from sick leave. Previously, it was only required to record sick leave liabilities if that leave was paid out upon termination or retirement, but GASB 101 changes the criteria.

Under GASB 101, all compensated absences look to the same conceptual framework for determining if a liability needs to be recorded. You should record paid leave liabilities — for sick leave or otherwise — if the leave meets all the following criteria:

1. It is attributable to services already rendered,

2. It accumulates, and

3. It is more likely than not to be used for time off or otherwise paid out, either in cash or some other form of remuneration, based on employment policies, historical use of paid leave, and actual payments made.

Under this new method, entities will likely have more compensated absence liabilities to report, mostly to do with sick leave. Thanks to the new methodology, you may still need to record unpaid sick leave liabilities even if the employee would never receive a payout at termination for unused time. As long as the sick leave has accumulated and is likely to be used during their tenure, it should be recorded.

What type of paid leave applies to GASB 101?

If they meet all three criteria, the types of leave that could qualify as a “compensated absence” (and therefore be governed by GASB 101) include:

• Sick leave
• Paid time off (PTO)
• Jury duty
• Holidays and floating holidays
• Military leave
• Parental leave
• Bereavement
• Certain types of sabbatical leave

How will your reporting change under GASB 101?

There are three reporting areas you should consider when you adopt GASB 101.

Face of the Financials

In general, entities should record a liability for (1) leave that has not been used and (2) leave that has been used but not yet paid out — but only if that leave meets all three of the aforementioned criteria. You’ll typically measure that liability based on the employee’s pay rate as of the date of the financial statements. There are some exceptions, though. For example, parental leave, jury duty leave, and military leave won’t get recorded as a liability until the leave commences or is used. The rest should typically be recorded as it is earned. Also, leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits should not be recognized as a liability for compensated absences.

Salary-related payments are obligations that a government incurs related to providing leave in exchange for services rendered (for example, the employer share of Social Security and Medicare taxes). A government should include in the measurement of its liabilities for compensated absences salary-related payments that are directly and incrementally associated with the leave.

Disclosures

Under legacy GASB 16, the notes to the financial statements should show the gross increases and gross decreases in compensated absence liability balance. Under GASB 101, they can continue to disclose compensated absence amounts in this manner, or they can choose to disclose only the net change. Governments are also no longer required to disclose which funds will be used to pay out those balances.

Restatement

This pronouncement is considered a change in accounting principle, which means that entities should look to Statement No. 100, Accounting Changes and Error Corrections (GASB 100) for guidance on when restatements are required. According to GASB 100, a change in accounting method generally requires you to both restate prior periods and adjust the beginning balances of your current period.

When does GASB 101 take effect?

GASB 101 was finalized in June 2022 by the Governmental Accounting Standards Board (GASB) but has just recently taken effect. Public sector entities are required to comply with GASB 101 for fiscal years beginning after December 15, 2023, and in all following periods. Public sector entities with June 30, 2025, year ends will have to reflect this change on their next reports.

What should you do to prepare?

Look closely at your employment agreements and your paid leave policies. Which types of leave would meet the three criteria for reporting? Do you track that type of leave, and if so, is that tracking up to date? If you are unsure how your reports will change, reach out to a leader in the LaPorte Public Sector Industry Group. They can help point you in the right direction.