posted September 9, 2015

Compensated Absences Liability - Determining the Amount Due within One Year

by Sara Kirk, Audit Manager

It is that time of year when your government has finalized or is about to finalize the accounting records for the fiscal year ended June 30, 2015 and is doing the same with the subsidiary schedule based items such as compensated absences.

The compensated absence liability reported within the accrual financial statements represents absences such as vacation and sick leave for which employees will be paid, as defined by the policies at each individual government.The complexity of the calculations required to arrive at the beginning balances, earned balances, used balances, and ending balances in dollars directly correlates to the complexity of the compensated absences policies that the government has in place.

The Government Accounting Standards Board (GASB) Statement No. 34 paragraphs 31 and 119c require governments to report and disclose the portion of long-term liabilities such as compensated absences that are due within one year of the financial statement date.Because this is not a known figure, as it is being reported in the financial statements in advance of the one year period, and because governments do not often have to make estimates for external financial reporting, this question was addressed by GASB in a Comprehensive Implementation Guide as follows:

"Compensated absences liabilities become 'due' upon the occurrence of relevant events such as resignations, retirements, and uses of leave balances by covered employees. Because these occurrences and related dollar amounts generally cannot be known reliably in advance, the portion of compensated absences due within one year should be estimated. The estimate could be based on such factors as historical trends or budgeted amounts and may be affected by other factors including the government’s policy regarding whether unused amounts from prior years are required to be used before amounts earned in the current period."

Your government should keep written documentation on the methodology used to estimate the portion of the compensated absences liability due within one year, not only to provide to your auditors upon request, but because consistency in application from year to year enhances the usefulness of financial information.

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