GASB 101 Compensated Absences: Audit Procedures for Governments

GASB Statement 101 changed the compensated absences liability that state and local governments report. The old question was mostly what the government would pay out at termination or retirement. The new question includes how much leave employees are likely to use as time off. For the audit team, that turns a stable accrual into an estimate with policy, history and judgment behind it. This guide sets out the model in the Statement and turns it into audit procedures. Paragraph references are to GASB Statement 101 (June 2022).

The effective date

Statement 101 is effective for fiscal years beginning after December 15, 2023, and all reporting periods thereafter (paragraph 32). Earlier application was encouraged. It applies to state and local governments that follow GASB standards.

The recognition model

A liability is recognized for leave that has not been used and for leave that has been used but not yet paid in cash or settled in a noncash way. For unused leave, three conditions must all hold:

1. The leave is attributable to services already rendered.
2. The leave accumulates from one reporting period to the next.
3. The leave is more likely than not to be used for time off or otherwise paid in cash or settled by noncash means.

"More likely than not" means a likelihood of more than 50 percent. Under paragraph 12, management weighs the government's employment policies, whether earned leave is or will become eligible for use or payment, and historical information about use, payment and forfeiture. Management also considers information that would indicate the history is not representative of future trends. Leave that is more likely than not to be converted into defined benefit postemployment benefits is not a compensated absence liability (paragraph 13).

Measurement

The general rule is the employee's pay rate as of the date of the financial statements (paragraph 16). If leave is more likely than not to be paid at a different rate, such as one-half of the rate at payment on termination, that portion uses the different rate as of the statement date (paragraph 17). Leave that has been used but not yet paid is measured at the cash payment or settlement amount (paragraph 21). The liability also includes salary-related payments that are directly and incrementally associated with the leave, such as the employer share of Social Security and Medicare taxes (paragraphs 22 and 23). Those tied to defined benefit pensions or defined benefit OPEB are excluded (paragraph 26).

Where the model changes the answer

Sick leave. This is the largest change. Under the old approach, many governments recorded sick leave only when a payout at termination was expected. Paragraph 14 says sick leave is recognized under the general criteria in paragraph 9. A liability is recorded for earned, accumulating sick leave that is more likely than not to be used for time off, even where sick leave is not paid at termination. Management has to estimate how much accrued sick leave will likely be used before termination, considering carryover rules, and measure it at the year-end pay rate, not the rate when the leave was earned.

Leave not recognized until it starts or is used. Paragraph 14 says leave that depends on a sporadic event affecting a relatively small proportion of employees is not recognized until the leave commences, and names parental leave, military leave and jury duty leave. Paragraph 15 says leave employees can take as needed without specific limits (unlimited leave) and holiday leave taken on a specific date, not at the employee's discretion, is not recognized until the leave is used. Floating holidays that employees use at their discretion are not within that holiday exception.

Sabbaticals. Unrestricted sabbatical leave, during which the employee is not required to perform any significant duties for the government, is a compensated absence (paragraph 4). Sabbatical leave during which the employee must perform duties of a different nature for the government, such as research instead of teaching, is not.

Disclosure

A government may present either the separate increases and decreases or the net change in the liability, and a net amount must be labeled as net (paragraph 30). The requirement to disclose which governmental funds typically liquidate the liability no longer applies (paragraph 31).

Where the audit risk sits

The liability moves from a payout formula to an estimate. The risk factors are:

• Policy completeness. Leave types sit in union contracts, personnel manuals, board resolutions and informal practice. A leave type missed in the inventory is a missed liability.
• The more-likely-than-not judgment. It rests on history of use, payment and forfeiture. A government whose records of leave usage are kept only for payroll may not be able to produce them.
• Data and rates. Balances come from the payroll system. Rates come from the pay table at year-end.
• Salary-related payments. Employer payroll taxes and defined contribution pension or OPEB contributions on the leave belong in the measurement (paragraphs 23 to 25), and are easy to omit from a recalculation.

Audit procedures

1. Inventory leave types. Obtain the personnel policies, collective bargaining agreements and any ordinance or resolution. List each leave type with its accrual, carryover, forfeiture and payout terms.
2. Understand management's process. Obtain the memo that applies the three criteria to each leave type and the historical data supporting the likelihood judgment.
3. Test the data. Agree balances from the leave system to the payroll register for a sample of employees. Test the completeness of the balance file by comparing the employee count to payroll.
4. Re-perform the likelihood analysis. Compute usage, payout and forfeiture from a multi-year history and compare with management's percentages. Test whether the history is consistent with current policy changes.
5. Recalculate. Recompute the liability by leave type: hours, rate at the reporting date, the percentage judged likely to be used or paid, and the salary-related payments.
6. Test the exceptions. For leave deferred until it starts, confirm none is accrued early and that leave in progress at year-end is recognized.
7. Check disclosures. Confirm the long-term liability note and the presentation of the change.

Worked example

Westfield Township reports to a June 30 fiscal year. It has 85 employees.

Sick leave. Accrued sick leave is 14,200 hours at an average year-end rate of $31.50. Policy pays no sick leave at termination, and carryover is unlimited. Three years of history show employees used 12 percent of the year-end balance in the following year on average. Management judges that about 30 percent of the accrued balance is more likely than not to be used before termination, based on use by long-service employees.

• Salary: 14,200 hours x 30 percent x $31.50 = $134,190.
• Employer Social Security and Medicare at 7.65 percent (a salary-related payment under paragraphs 22 and 23): $134,190 x 7.65 percent = $10,266.
• Liability: $134,190 + $10,266 = $144,456.
• Under the old approach, the township recorded no sick leave liability because nothing is paid at termination.

Auditor's challenge. The 30 percent is not supported by the 12 percent annual use alone. The auditor asks for the analysis that links one-year usage to use before termination, tests it against retirees' history of balances at separation, and asks whether employees who left in the last three years carried unused balances. The file records the range and why management's point estimate is reasonable.

Parental leave. Policy grants six weeks. One employee began leave two weeks before year-end. Leave in progress is recognized for the remaining weeks, and no liability is recorded for employees who have not begun leave.

Unlimited leave. The township's appointed officials have unlimited leave. No liability is accrued before use, and the auditor confirms the policy text.

Common misses

• Counting only vacation and omitting sick leave under the new test.
• Leaving employer payroll taxes out of the liability.
• Using the pay rate at the time the leave was earned instead of the year-end rate.
• Accruing parental or military leave before it starts.
• Relying on a payout-based formula for leave that is mostly used.

Related reading

For other governmental standards, see GASB 87 lease audit procedures and GASB 96 SBITA audit procedures. For the reporting entity view, see GASB vs FASB.

Where CORAA fits

CORAA prepares ready-to-review audit files for US CPA firms, including leave inventories and liability recalculations by leave type. The firm keeps the client, the review and the signature. See /us.

Sources

• GASB, Statement No. 101, Compensated Absences (June 2022): https://d2x0djib3vzbzj.cloudfront.net/GASBS%20101.pdf
• Journal of Accountancy, GASB streamlines guidance on compensated absences with unified model: https://www.journalofaccountancy.com/news/2022/jun/gasb-streamlines-guidance-compensated-absences-unified-model/
• PKF O'Connor Davies, Understanding the GASB update for compensated absences: https://www.pkfod.com/insights/understanding-the-gasb-update-for-compensated-absences/
• Baker Tilly, GASB Statement 101, Compensated Absences: https://www.bakertilly.com/insights/gasb-statement-101-compensated-absences

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