GASB 101 Compensated Absences: Recognition, Measurement, and Disclosure

GASB 101 is the Governmental Accounting Standards Board’s unified model for how state and local governments account for compensated absences, and it replaces GASB Statement No. 16, which had governed this area since 1992. The standard applies to fiscal years beginning after December 15, 2023, with early adoption encouraged. Two changes drive most of the impact on financial statements: the recognition threshold drops from “probable” to “more likely than not,” and the old requirement that leave must vest before it can produce a liability is gone.¹

What Counts as a Compensated Absence

A compensated absence is any leave arrangement where an employee is paid while absent from work, or receives a cash payout or other settlement for unused leave. Vacation, sick leave, paid time off banks, and personal leave are the familiar examples. Certain sabbaticals also qualify, but only when the employee has no significant duties for the government during the leave. A professor whose sabbatical requires ongoing research for the institution fails that test; an unrestricted sabbatical passes.²

Holiday leave tied to a specific calendar date generally does not create a liability because it does not carry forward. If the employer’s policy lets employees bank unused holiday hours for later use, the banked portion is within scope.

The Three-Part Recognition Test

A government recognizes a liability for unused leave when all three of the following are true. The leave is attributable to services the employee has already performed. The leave accumulates, meaning unused hours carry into future periods. And the leave is more likely than not to be used for time off or settled through cash payment or other means.¹

The third condition is where judgment sits. Look at your own employment policies and how employees actually behave. Where staff routinely carry large vacation balances forward and cash them out at retirement, the evidence supports recognition. Where use-it-or-lose-it rules keep carryover low, some leave categories may fall below the threshold.¹

Leave Already Used but Not Yet Paid

Leave that has been taken but not yet settled at the financial statement date is also a liability. If an employee used vacation in the last week of the fiscal year and the paycheck covering that period hasn’t been issued, the amount is recorded at the actual cash payment or noncash settlement value, not estimated.¹

Sporadic-Event Exception

Leave tied to unpredictable life events is not recognized until the employee begins the absence. The standard names parental leave, military leave, and jury duty. Sick leave and sabbatical leave are explicitly excluded from this exception and follow the normal three-part test.²

What Changed from GASB 16

Vesting Is No Longer Required

Under GASB 16, leave generally had to vest before a government recorded a liability, meaning the employee needed a legal right to a cash payout on termination. GASB 101 drops that requirement. Nonvesting leave now qualifies for recognition as long as the three-part test is met, because the Board concluded that an obligation exists once leave is earned regardless of whether it can be cashed out.³

A Lower Probability Threshold

GASB 16 used a “probable” standard for sick leave liabilities, which auditors applied inconsistently. GASB 101 replaces it with “more likely than not,” meaning a greater than 50 percent chance the leave will be used or paid out. For many governments this will produce a larger liability than the old rules did.¹

Simpler Disclosure

GASB 16 required disclosure of gross increases and gross decreases in the liability. GASB 101 lets governments report either the separate increases and decreases or just a net change, provided the net figure is clearly labeled. The old requirement to identify which governmental fund is typically used to liquidate the liability is also gone.²

Measuring the Liability

For leave that has not yet been used, the liability is measured at the employee’s pay rate as of the financial statement date, so the figure reflects current compensation rather than the rate in effect when the leave was earned.¹

Payout ratios matter. Many government employment agreements pay unused vacation at 100 percent on separation but pay unused sick leave at a reduced percentage, sometimes 25 or 50 percent depending on the collective bargaining agreement or policy. The measurement has to account for those varying ratios, and professional judgment supported by historical workforce data drives the estimate of how much leave will be used as time off versus paid out in cash.

Salary-Related Payments

The liability is not limited to the raw pay amount. Include salary-related payments that are both directly and incrementally associated with the leave payout. A payment is directly associated if its amount depends on the salary being paid, and incrementally associated if it represents an additional cost on top of the salary. The employer’s share of Social Security tax at 6.2 percent and Medicare tax at 1.45 percent are the standard examples.²⁴

Pension treatment depends on plan type. Defined contribution pension and OPEB payments must be included in the compensated absences measurement when the leave is earned. Defined benefit pension and OPEB contributions are explicitly excluded even if they would otherwise meet the directly-and-incrementally-associated test, because those obligations are already captured through the net pension liability reported under GASB Statements 68 and 75.²

Donated Leave Pools

When accumulated leave has been donated to a shared employee leave pool and is no longer attributable to a specific employee, measure the liability by multiplying the pooled hours by an estimated pay rate representative of the eligible employee population.³

Government-Wide vs. Governmental Fund Reporting

Where the liability appears depends on which statements you’re looking at, and this distinction trips up first-time implementers.

In the government-wide statements, which use the economic resources measurement focus and full accrual, the compensated absences liability is recognized whenever the three-part test is met. The full estimated obligation goes on the statement of net position, with a corresponding expense in the period the leave is earned.¹

Governmental fund statements use the current financial resources measurement focus and modified accrual basis. Expenditures for compensated absences are recognized only for the amount that would normally be liquidated with expendable available financial resources. In practice a liability becomes matured and payable in a governmental fund when a specific event triggers payment, such as an employee’s resignation or retirement. Setting money aside for eventual payout of unmatured leave is not a current financial resource outflow and does not trigger a fund liability or expenditure; the unmatured portion appears only in the government-wide statements.²

Disclosure Requirements

Under the long-term liabilities disclosure framework in GASB Statement No. 34 as amended by GASB 101, present the beginning and ending balances of the compensated absences liability along with changes during the year. Governments can now show those changes as either separate increases and decreases or as a single net change, as long as the net figure is clearly labeled.²

Split the liability into a current portion, meaning the amount expected to be paid within one year of the reporting date, and a non-current portion for anything beyond. GASB 101 does not prescribe a first-in, first-out or last-in, first-out assumption for identifying which leave dollars make up the current portion. The Board considered guidance on this and left it to professional judgment.²

One disclosure is retired: the identification of which governmental fund is typically used to liquidate compensated absence liabilities.³

When Leave Belongs Under a Different Standard

Leave included in a termination benefit package falls under GASB Statement No. 47, not GASB 101. An early retirement incentive that includes a lump-sum payout for accumulated sick leave as part of the package is a termination benefit. The test is whether the leave payment is bundled into a termination offer or is simply the normal payout an employee would receive on any separation. Only the latter belongs in the compensated absences liability.²

Transition and What to Expect

Adoption is treated as a change in accounting principle under GASB Statement No. 100, Accounting Changes and Error Corrections. Restate the financial statements for all periods presented in the report. For periods before the earliest year shown in the comparative statements, report the cumulative effect as a restatement of beginning net position, or beginning fund balance where applicable, for the first year presented.²

For most governments the transition adjustment will increase the compensated absences liability, driven by the lower probability threshold and the removal of the vesting requirement. Sick leave is the most common source of the increase: many entities excluded nonvesting sick leave entirely under GASB 16, while GASB 101 requires it whenever the three-part test is met. Run the calculation well before the first reporting deadline under the new standard so the audit does not produce surprises.

1
Governmental Accounting Standards Board. Summary of Statement No. 101 – Compensated Absences
2
Governmental Accounting Standards Board. Statement No. 101 of the Governmental Accounting Standards Board – Compensated Absences
3
Governmental Accounting Standards Board. Compensated Absences – Reexamination of Statement 16
4
Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates