Government entities are facing another significant change in financial reporting with the implementation of GASB Statement No. 101, Compensated Absences. This new standard, which replaces GASB 16, introduces substantial modifications to how organizations recognize and measure liabilities for employee leave benefits. As your advisors, we want to help you understand these changes and prepare for successful implementation.
Key Timeline and Impact
For entities with calendar year-ends (December 31), implementation began in 2024. Those with fiscal year-ends (June 30) will be implemented in 2025. The standard requires restatement of beginning balances, and early analysis indicates it could increase compensated absences liabilities significantly in some cases.
Three Major Changes
1. Expanded Scope of Leave Recognition
Unlike GASB 16, which primarily focused on potential severance payments, GASB 101 requires recognition of leave that current employees will use before terminating employment. This represents a fundamental shift in how we view and calculate these liabilities.
2. New Probability Threshold
The standard introduces a “more likely than not” threshold (greater than 50%) for recognition, replacing the previous “probable” standard that was typically interpreted as 70-80% likelihood. This lower threshold means more leave benefits will qualify for recognition.
3. Flow Assumptions Matter
The choice between First-In-First-Out (FIFO) or Last-In-First-Out (LIFO) methodology can significantly impact liability calculations. Early implementations show that using FIFO could potentially quadruple the liability compared to current levels, while LIFO might result in more modest increases.
What’s Included and What’s Not
The standard primarily affects:
- Vacation leave
- Sick leave
- Paid Time Off (PTO)
- Floating holidays that accumulate
- Certain types of sabbatical leave
Exclusions include:
- Regular holiday leave
- Parental leave
- Bereavement leave
- Military leave
- Jury duty
- Leave that doesn’t accumulate
- Unlimited leave policies
Implementation Considerations
Success with GASB 101 requires careful attention to several factors:
Policy Review: Organizations need to review all formal and informal leave policies, including union agreements and departmental variations. This is particularly important for entities with multiple departments or employee classifications.
Historical Data: You’ll need to analyze:
- The relationship between leave earned versus used (targeting 2-3 years of history)
- Payment patterns when employees terminate employment
- Any recent policy changes that could affect future patterns
Rate Calculations: The standard requires using current rates of pay at the balance sheet date, including consideration of salary-related payments like certain defined contribution benefits.
Looking Ahead
While GASB 101 presents implementation challenges, it also offers an opportunity to enhance financial reporting transparency. The key to successful implementation lies in early preparation and careful analysis of your organization’s specific circumstances.
Organizations should begin gathering historical data, reviewing policies, and working with their advisors to determine appropriate methodologies for their situation. This proactive approach will help ensure smooth implementation and accurate financial reporting under the new standard.
You can watch our recent webinar covering the details of this update, here. For more information about implementing GASB 101 or to discuss your organization’s specific situation, reach out to your Rea advisor.
By Jared Cottrell (Newark Office)