Addressing the GASB 101 Challenge – How to Estimate Sick Leave Usage

Addressing the GASB 101 Challenge – How to Estimate Sick Leave Usage

By: Kelly Telford, CPA, Partner, Consulting & Advisory, LSL 

In June 2022, the Governmental Accounting Standards Board (GASB) issued Statement No. 101, Compensated Absences, which becomes effective for fiscal years beginning after December 15, 2023. The Statement updates recognition and measurement requirements for leave benefits such as vacation and sick leave.

While vacation leave typically follows clear rules, sick leave presents a challenge because it is less common for sick leave to be paid out at separation. GASB 101 requires governments to record a liability when three criteria are met:

1. The leave is attributable to services already rendered.
2. The leave accumulates.
3. It is more likely than not to be used for time off or settled in cash or noncash.

What makes sick leave tricky is the third criterion. Sick leave is different from vacation because its use depends on an employee or a relative becoming ill and typically is non-vesting, therefore the balances are forfeited at separation. However, GASB 101 reasoned that once employees earn the leave, governments have an obligation for the portion that is more likely than not to be used.

So how do we estimate how much is “more likely than not to be used”? The GASB defines this as greater than 50% probability. However, the Board did not prescribe a single method for calculating sick leave under GASB 101, which has created confusion and uncertainty. It’s important to understand that there is no ‘one size fits all’ approach to this estimate and what worked for one organization may not make sense for another organization. Here are some practical steps to consider as you are developing your approach during implementation:

Step 1: Analyze Historical Data

• Start with at least three years of sick leave usage (historical data). The information should be accessible from your payroll or HR systems. Over time, build toward five or more years of data for a more stable estimate.

• Selecting a number of years to start with could have impacts. For example, during COVID, some agencies might observe sick leave usage drop when employees worked from home, while others have spikes if staff remained in-person due to stricter health protocols. In these cases, usage would be misleading without context. It’s important to understand the trends and events that could lead to outlier years.

Step 2: Identify the Portion that is More Likely than Not to be Used

• Estimating usage at the individual level is ideal to build out the estimations for “more likely than not” but often might require adjustment due to inconsistent amounts of data. For example, new employees may not have enough data to make a reasonable estimate. Consider referencing usage patterns from similar roles or groups to provide a representative estimate.

• Use these amounts to determine the “more likely than not to be used” amount, converting it to a percentage.

Step 3: Calculate the liability

• Multiply the total sick leave hours at the end of the fiscal year by the percentage determined in Step 2. Multiply this number by the employee’s pay rate and other employer paid benefits.

Restatement Considerations

GASB 101 represents a change in accounting principle, therefore, a prior period restatement is generally required for entities presenting comparative financial statements—unless it is impracticable to do so. For governments that do not present comparative periods, the cumulative effect of adoption should be recognized by adjusting beginning net position or fund balance.

Materiality is also a factor in determining how governments handle restatements. When the impact of implementing GASB 101 is deemed immaterial, the disclosure can be limited to simply noting the adoption of the new standard and describing its effect. However, if the impact is significant, governments must provide comprehensive disclosures. These should explain the nature of the change, its financial impact, and any practical limitations in restating prior periods. To determine materiality, it is advisable to consult with auditors once calculations are complete.

The new model aims to improve consistency across governments but requires thorough data analysis and documentation. Auditors will be looking for a clear methodology linking historical experience to management’s estimates as part of their test work. 

Kelly Telford, CPA, is a partner in LSL’s consulting & advisory department and has over 20 years of experience in working in and with government agencies. Her background includes auditing, accounting, financial forecasting, budget development, public utilities, investment management, grant management, human resources, and information technology.

Kelly oversees engagements for a variety of non-profit and governmental clients, providing consulting services, often acting as an extension of their finance department.

Prior to returning to LSL in 2022, Kelly served as the Director of Finance and Treasurer for the cities of Seal Beach and Costa Mesa.