Compensated absences under GASB 101

In this lesson you will

Apply the three GASB 101 criteria for recognizing a liability for unused leave
Identify leave types that are recognized only when leave starts or is used
Measure the liability including salary-related payments
Plan audit procedures over leave balances and usage history

Effective date and scope

GASB Statement No. 101, Compensated Absences, replaced Statement 16. It is effective for fiscal years beginning after December 15, 2023, and all reporting periods after that. A June 30 government first applied it for the year ended June 30, 2025; a calendar-year government for 2024. Compensated absences cover leave for which employees may receive cash payments or noncash settlements, such as vacation, sick leave, paid time off, holidays, parental leave, military leave, jury duty and unrestricted sabbaticals.

The recognition model

A liability is recognized for two things: (1) leave that has not been used, and (2) leave that has been used but not yet paid in cash or settled.

Unused leave is a liability when all three criteria are met:

Attributable to services already rendered: the employee has performed the services required to earn it.
Accumulates: it can be carried forward from the period earned to a future period in which it may be used, paid or settled.
More likely than not to be used for time off or otherwise paid or settled: more likely than not means a likelihood of more than 50 percent. The government considers employment policies and historical information about use and payment.

Vesting is no longer the test. Sick leave that is never paid out at termination is still a liability to the extent it is more likely than not to be used as time off. Leave that is more likely than not to be settled by conversion into defined benefit postemployment benefits is excluded from the compensated absence liability; it belongs in pension or OPEB.

Exceptions

Recognized when the leave commences: leave that depends on a sporadic event affecting a small share of employees in a period. Parental leave, military leave and jury duty leave fall here. Sick leave and unrestricted sabbatical leave do not; they follow the general model.
Recognized when the leave is used: unlimited leave that employees can take without specific limits, and holiday leave taken on a specific date not at the employee's discretion.

Measurement

Unused leave is measured at the employee's pay rate as of the financial statement date, unless the leave is more likely than not to be paid at a different rate (for example, a payout policy at a reduced rate). Used but unpaid leave is measured at the cash payment or noncash settlement to be made. Salary-related payments that are directly and incrementally associated with leave payments are included, such as the employer share of Social Security and Medicare taxes and contributions to defined contribution pension and OPEB plans. Payments tied to defined benefit pensions or defined benefit OPEB are excluded.

Governmental funds and disclosures

In governmental funds, expenditures are recognized for the amount normally expected to be liquidated with expendable available financial resources, for example leave payouts due to employees who have left at year end. A government can now disclose only the net change in the liability, if labeled as a net change, and no longer has to disclose which governmental funds have been used to liquidate the liability.

Audit procedures

Obtain the leave policies and union agreements: carryover caps, payout rules, sick leave conversion to pension service credit.
Test leave balances for a sample of employees to payroll records and accrual rates.
Evaluate the usage history behind the more-likely-than-not estimate, especially for sick leave. A government that books no sick leave liability without usage data has a gap.
Recompute the pay rate and salary-related payment components.
Agree the liability rollforward to the notes.

The GASB 101 audit guide has more tests, and the ASC 710 guide shows the commercial model.

Worked example

Measuring the liability at Birch Valley School District

Birch Valley has a June 30, 2026 year end. Average pay rate at June 30 is $35 per hour. The employer share of Social Security and Medicare is 7.65 percent.

Vacation: 6,000 hours accumulated within the carryover cap. Policy pays unused vacation at termination, and history shows nearly all is used or paid. All 6,000 hours meet the criteria. 6,000 x 35 = $210,000. Salary-related: 210,000 x 7.65 percent = $16,065. Vacation liability = $226,065.

Sick leave: 20,000 hours accumulated, not paid at termination. Five years of usage data show 30 percent of accumulated sick hours are used as time off. Hours the usage history supports as used or paid = 20,000 x 30 percent = 6,000. 6,000 x 35 = $210,000 + 7.65 percent ($16,065) = $226,065.

Parental leave: two employees have announced leave starting in August. It has not commenced, so no liability. Holiday pay for July 4: taken on a fixed date, recognized when used. No liability.

Total compensated absences liability = 226,065 + 226,065 = $452,130.

General fund: $12,000 of vacation payouts was owed to employees who resigned in June and paid in July. That amount is a fund liability and expenditure; the remaining $440,130 appears only in the government-wide statements.

Conclusion: under the old vesting approach the district booked no sick leave; GASB 101 adds $226,065.

Self-check

Answer each question before you open the answer.

What are the three criteria for recognizing a liability for unused leave?
Show answer
The leave is attributable to services already rendered, it accumulates, and it is more likely than not (over 50 percent) to be used for time off or otherwise paid or settled.
When is a liability for jury duty leave recognized?
Show answer
When the leave commences. Jury duty depends on a sporadic event that affects a small share of employees in a period, and GASB 101 groups it with parental and military leave.
Is sick leave that is never paid at termination a liability under GASB 101?
Show answer
Yes, to the extent it is more likely than not to be used as time off, based on policies and usage history. GASB 101 replaced the vesting test with the more-likely-than-not test, so payout at termination is no longer required.
What rate is used to measure unused leave?
Show answer
The employee's pay rate at the financial statement date, unless the leave is more likely than not to be paid at a different rate, plus directly and incrementally associated salary-related payments.

Sources

GASB Statement No. 101, Compensated Absences

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error