The GASB has issued an Exposure Draft entitled Compensated Absences. This Exposure Draft addresses the recognition and measurement guidance for compensated absences and refines the related disclosure requirements.
The Exposure Draft would require that a liability for compensated absences be recognized if three criteria are present:
- The absence accumulates. Absences that accumulate would be those that can be carried forward from the reporting period in which they are earned to a future reporting period when they will be paid or settled.
- The absence is attributable to services rendered. Absences that are attributable to services rendered would be those for which an employee already has performed the services required to earn the payment or settlement.
- The absence is more likely than not to be either paid (including being paid for use) or settled through other means. In estimating the accumulated leave that is more likely than not to be paid or settled, a government would consider relevant factors, such as employment policies related to compensated absences and historical information about the payment of compensated absences, among others.
The Exposure Draft also would establish guidance for measuring a liability, which generally would require accumulated leave to be multiplied by an employee’s pay rate as of the financial reporting date. Certain salary-related payments that are both directly and incrementally associated with payments for compensated absences (such as the employer portion of social security taxes or Medicare taxes) also would be included in the measurement of a liability.
The Exposure Draft would require that accumulated leave that is more likely than not to be settled through conversion to defined benefit postemployment benefits not be included in the compensated absences liability. However, accumulated leave that is more likely than not to be paid to an employee through a distribution to an individual account to be used for specified purposes (such as payment of the employee’s share of future healthcare premiums) would be included in the compensated absences liability following the general measurement provisions of the Exposure Draft.
In estimating the amount of the compensated absences liability that is due within one year, governments would be required to use the first-in, first-out flows assumption.
With respect to financial statements prepared using the current financial resources measurement focus, the Exposure Draft would require that a governmental fund liability and expenditure be recognized as payments for compensated absences come due each period.
The Exposure Draft would provide an exception to the existing requirement to disclose the gross increases and decreases in a compensated absences liability such that governments would be allowed to disclose only the net change in the liability. In addition, governments would no longer be required to disclose which governmental funds typically have been used to liquidate the compensated absences liability.
The requirements of the Exposure Draft would be effective for reporting periods beginning after December 15, 2022. Earlier application would be encouraged. The comment deadline for the Exposure Draft is June 4, 2021.
The full text of the Exposure Draft is available here.
Readers should not act upon information presented without individual professional consultation.