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An exposure draft of the Governmental Accounting Standards Board (GASB), Compensated Absences, would have public institutions accrue liabilities and recognize expenses for benefits that do not vest. Recognition would be based on whether—

  • Employees are more likely than not to use the benefit, and
  • The absence accumulates, and
  • It is attributable to services rendered.

In a comment letter submitted to GASB on June 4, NACUBO indicated that accumulated leave balances that are forfeited upon termination do not represent “a present obligation to sacrifice resources that the government has little or no discretion to avoid,” as defined in Concepts Statement No. 4, Elements of Financial Statements. GASB’s views are grounded in the employer-employee exchange; employees earn benefits in exchange for services provided to their employer. However, when employees earn leave benefits that do not vest, employers are only obligated to pay leave (such as sick time) to employed individuals.

NACUBO staff and Accounting Principles Council members believe that an obligation to provide paid leave in a future period cannot be a binding obligation when the benefit does not vest. Essentially, there is no expense beyond lost production for the days off in the future period; the compensation to the employee does not change. As such, not only is an accrued liability not appropriate, but the associated expense does not meet the definition of an outflow of resources, as defined in Concepts Statement 4, because there is no consumption of net assets applicable to the reporting period when the benefit is earned. Further, developing a predictive model based on whether employees are more likely than not to use such benefits could be fraught with inaccuracies and the cost might not be worth the benefit. 

We asked GASB to reconsider their position on nonvested benefits so that liability recognition would only occur when compensated absences vest. NACUBO also expressed appreciation for proposed disclosures that would allow public institutions to disclose only the net change in compensated absence liabilities.  


Sue Menditto

Senior Director, Accounting Policy


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