Compensated Absences—Reexamination of Statement 16
Research Description: The initial objectives of this pre-agenda research are (1) to evaluate the effectiveness of Statement No. 16, Accounting for Compensated Absences, as amended, and (2) to consider whether additional guidance needs to be developed. If additional guidance is determined to be needed, another objective will be to consider the development of revised accounting and financial reporting standards for compensated absences.
Added to Research Agenda: August 2018
- Major Research Issues
- Current Developments
- Research Work Plan
- Project staff:
Compensated Absences—Project Plan
Background: Compensated absences are unused leave time for which employees will be paid at the end of their employment, such as vacation, sick leave, and sabbatical leave. Before the issuance of Statement 16, the existing standards of accounting and financial reporting for compensated absences were established in NCGA Statement 4, Accounting and Financial Reporting Principles for Claims and Judgments and Compensated Absences. Although the criteria for measuring the liability were the same for all fund types, differences between the measurement focuses of governmental and proprietary fund types resulted in differences in the amounts recognized in a period’s operations and in how the accrued liability was displayed. Statement 16 was issued in 1992 to establish standards of accounting and reporting for compensated absences regardless of the reporting model or fund type used to report the transactions.
For vacation leave and other compensated absences with similar characteristics (primarily, that compensation is based only on rendering past service), Statement 16 requires that governments accrue a liability as benefits are earned, presuming it is probable that the employer will compensate the employees for the benefits (either with paid time off or cash payments at the end of employment). Sick leave and similar compensated absences, by contrast, should be accrued as a liability either (1) as benefits are earned, to the extent it is probable the employer will compensate the employees through cash payments on the condition employment ends (termination payments) or (2) based on leave accumulated as of the date of the financial statements by employees currently eligible or expected to become eligible in the future (vesting) to receive termination payments. Compensated absences liabilities generally should be measured using the pay or salary rates in effect as of the date of the financial statements and should include accruals for certain salary-related payments such as the employer’s share of FICA.
Statement 16 was first effective for periods beginning after June 15, 1993. Certain provisions in the Statement have been superseded or amended by Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments, Statement No. 35, Basic Financial Statements—and Management’s Discussion and Analysis—for Public Colleges and Universities, Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, and Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements. However, the effectiveness of Statement 16 itself has not been evaluated, nor has it been reconsidered in light of the GASB’s conceptual framework—particularly Concepts Statement No. 4, Elements of Financial Statements, Concepts Statement No. 6, Measurement of Elements of Financial Statements, and the concepts under development related to recognition. It is one of the longest standing GASB pronouncements yet to be reexamined.
Compensated absences are a fairly common topic for technical inquiries. Over 75 inquiries have been documented in the databases during the past decade. Many of the inquiries ask for application guidance under a specific set of circumstances. Recurring or significant issues include:
- The effects of Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements, on accruals in governmental funds
- Using an internal service fund to account for compensated absences
- Conversion of accumulated amounts at termination to defined pension or other postemployment benefits (OPEB).
The staff responses to the questions in the databases usually apply or interpret the guidance in the Statement to the specific situations in the inquiries; the nature of the inquiries does not indicate that provisions of the Statement are unclear or difficult to apply. Virtually no questions have been asked about how to measure the liability under the provisions of paragraph 8 in recent years.
External research on compliance with Statement 16 was conducted with funding from the Gil Crain Memorial Research Grant Program. That research was completed in August 2009. The study examined a sample of 1,075 financial reports covering fiscal years 2005–2008 from 470 states, counties, localities, and school districts.
Major Research Issues: The following issues will be considered:
- What method(s) do governments use to calculate the liability for compensated absences: the termination payment method or the vesting method (as described in paragraph 8 of Statement 16)?
- Should there continue to be a choice regarding how to calculate the liability? Should one method be eliminated?
- Pre-agenda research approved: August 2018
Research Work Plan:
|January–March 2019:||Continue literature review; examine Crain Grant study and conduct supplementary research, if necessary.|
||Develop, pretest, and administer preparer and auditor survey instruments and analyze results.|
|September–November 2019:||Conclude analysis of research results and draft research memorandum.|
||Discuss research memorandum with the Board.|