The Governmental Accounting Standards Board (GASB) issued exposure draft, Compensated Absences, to align the recognition and measurement guidance for compensated absences and refine the related disclosure requirements.
While superseding Statement No. 16, Accounting for Compensated Absences, the proposed guidance would unify the accounting for all types of compensated absences under one model.
Comments on the exposure draft are due June 4, 2021.
What Are Compensated Absences?
Governments routinely provide benefits to employees in the form of compensated absences.
A compensated absence is a leave that employees use for time off with pay and for which employees receive payment upon termination of employment or settlement through other means.
Compensated absences generally don’t have a set payment schedule and may include:
- Vacation leave
- Sick leave
- Paid time off
- Parental leave
- Bereavement leave
- Certain types of sabbatical leave
How Are Compensated Absences Recognized and Measured?
In effort to enhance comparability between governments that offer different types of leave, the proposed guidance would introduce a recognition and measurement model that could be applied consistently to all types of compensated absences.
Under the proposed guidance, governments would be required to record a liability for compensated absences when the following criteria is met:
- The absence accumulates
- The absence is attributable to services rendered
- The absence is more likely than not to be either paid or settled through other means
Determining whether an absence is more likely than not to be either paid or settled will require governments to develop an estimate that considers, among other things, such factors as:
- The government’s employment policies related to compensated absences, which may differ by employee class
- Whether benefits for which services have been rendered will become eligible for payment in the future
- Historical information about payment or forfeiture of compensated absences
The compensated absences liability would generally be calculated by multiplying the accumulated leave that’s more likely than not to be paid or settled—often measured in hours—by the employee’s pay rate as of the financial reporting date.
The compensated absences liability would also include the following:
- Certain salary-related payments that are both directly and incrementally associated with payments for compensated absences—for example, employer share of Social Security and Medicare taxes
- Accumulated leave that’s more likely than not to be paid to an employee through a distribution to an individual account to be used for specified purposes
However, accumulated leave that’s more likely than not to be settled through a conversion to defined benefit postemployment benefits wouldn’t be included in the compensated absences liability.
What Disclosures Are Required?
Under the proposed guidance, governments wouldn’t be required to disclose the governmental funds used to liquidate the compensated absences liability.
Governments would also be allowed to disclose either:
- The gross increases and decreases
- Only the net change in the compensated absences liability
Governments that disclose a net increase or net decrease should indicate it’s a net amount.
What Are the Effective Dates?
The proposed guidance would be effective for reporting periods beginning after December 15, 2022.
The proposed changes should be applied retroactively by restating the financial statements for all prior periods presented. If restatement for prior periods isn’t practicable, the cumulative effect of applying the proposed guidance should be reported as a restatement of beginning net position for the earliest period restated.
Early application would be encouraged.
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For more information on how the proposed guidance for compensated absences could affect your organization, contact your Moss Adams professional.