The Governmental Accounting Standards Board (GASB) issued Statement No. 101 in June 2022. GASB 101 replaces GASB 16 and updates the recognition and measurement guidance for compensated absences. The requirements of Statement No. 101 are effective for fiscal years beginning after December 15, 2023.

Objective and scope of GASB Statement No. 101

The primary objective of Statement No. 101 is to improve the financial reporting of liabilities associated with compensated absences. Compensated absences include benefits that employees earn, such as vacation, sick leave, paid time off (PTO), holidays, parental leave, bereavement leave, and other types of paid leave. The requirements of this statement apply to the financial statements of all state and local governments.

How GASB Statement No. 101 recognizes and measures liabilities for compensated absences

Statement No. 101 establishes a unified model for recognizing and measuring liabilities for compensated absences. It requires that liabilities be recognized for leave that has not been used and for leave that has been used but not yet paid or settled. The criteria for recognizing a liability for unused leave include:

1. The leave is attributable to services already rendered as of the measurement date.
2. The leave accumulates and can be used, paid, or settled in a future reporting period.
3. The leave is more likely than not to be used or otherwise paid or settled.

Leave valued under the statement is based on the leave that is “more likely than not” to be paid (i.e., used) in a future period while employed or payable at termination or retirement. Note that the prior Statement No. 16 only focused on sick leave payable at termination of employment or retirement. Statement No. 101 primarily includes sick leave and vacation.

The measurement of liabilities for unused leave is generally based on an employee’s pay rate as of the date of the financial statements. However, if the leave is more likely than not to be paid at a different level, that level should be used. Examples include:

• Employee receives a payout at termination equal to unused leave multiplied by the employee’s pay rate multiplied by 50%.
• Employee receives a payout at termination equal to unused leave multiplied by the employee’s pay rate up to $10,000.

Liability calculations also should include the employer’s share of applicable Federal Insurance Contributions Act (FICA) and Railroad Retirement Board (RRB) taxes. In addition, any employer contributions to defined contribution plans are also included in the liability calculations.

GASB Statement No. 101’s impact on financial reporting

Statement No. 101 was designed to result in a liability for compensated absences that better reflects when a government incurs an obligation and utilizes a modeling process that can be consistently applied to a wide variety of compensated absence programs. The Standards Board believes that Statement No. 101 will enhance the comparability of compensated absence liabilities between governments that offer increasingly different types of leave.

The transition to the new Statement No. 101 is expected to generally result in a higher overall liability for compensated absences than previously recognized under the prior Statement No. 16. This is primarily due to including leave that will be used in future years while still employed, in addition to the liability for leave projected to be paid at termination or retirement. In many cases, the leave projected to be paid while employed could be as much as 10 to 20 times the leave projected to be paid at termination or retirement.

Exceptions and coordination with other GASB statements

The statement provides exceptions for leave dependent on sporadic events, such as parental leave, military leave, and jury duty leave. Such leave is recognized only when the leave commences. Likewise, leave that is included in a defined benefit pension or defined benefit other postemployment benefits (OPEB) plan under Statements 68 or 75 should not be included in liabilities under Statement 101. Furthermore, leave that is considered part of a termination benefit package and covered under Statement 47 should also be excluded when calculating liabilities under the statement.

Reasons for involving an actuary

While Statement No. 101 does not require the use of an actuary to calculate liabilities, actuarial expertise can be valuable. Actuaries can leverage historical pension and OPEB data to save employers time and potentially lower the amount of liability they are required to book.

Several reasons underscore the value of hiring an actuary for GASB Statement No. 101 analysis:

1. Determination of assumptions: Actuaries can help determine the "more likely than not" assumptions or other related assumptions, which can be complex for governmental entities lacking the necessary data or expertise.
2. Utilization of historical data: If actuaries have previously conducted pension or OPEB work for the government, they may already have historical data that can be leveraged for this analysis.
3. Refined assumptions: More granular assumptions developed using actuarial techniques could result in a better estimate, potentially lowering the liability.
4. Exclusion of leave already accounted for under pension or OPEB plans: Excluding leave already accounted for in pension (GASB 68) or OPEB (GASB 75) calculations can be challenging due to complex assumptions, benefit formulas, and actuarial cost methods involved. Actuaries can help quantify the amount of leave already accounted for under these statements to eliminate any double counting of liability under Statement No. 101.
5. Reserve fund calculations: Some governments may wish to establish a reserve fund for compensated absence liabilities and would benefit from an actuarially determined amount to budget to the reserve fund. This could entail understanding the impact of paying leave at the applicable rate of pay in the future versus the current rate of pay.
6. Analyze benefit of including leave in the pension or OPEB plan: Actuaries can help governmental employers determine whether it is beneficial to include leave historically paid at termination or retirement into an existing retirement plan. Doing so could potentially lower the net impact on the financial statements while also allowing for the liabilities to be pre-funded under an existing pension or OPEB trust.

Conclusion: The impact of GASB Statement No. 101 on governments

Statement No. 101 represents a significant update to the accounting and financial reporting standards for compensated absences. Implementing the new statement can represent a steep learning curve for governments that don’t have expertise in these matters. Engaging the services of actuaries could help lessen the burden on staff as well as provide a more refined calculation of the liabilities under the statement. Please contact your Milliman consultant for more information on how we might help.