Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 5 – Long-Term Liabilities
Compensable Leave Liability Methodology

Agencies commonly provide benefits to employees in the form of compensated absences. Agencies must account for and report a liability for compensated absences on a basis with governmental fund accounting principles:

• In the agency’s annual financial report, prepared using the current financial resources measurement focus (modified accrual), expenditures for compensated absences must be recognized and must be the amount that normally would be liquidated with expendable available financial resources.
• In the agency’s annual financial report, prepared using the economic resources measurement focus (full accrual), liabilities for compensated absences must be recognized for leave that has not been used and leave that has been used but not yet paid or settled.

Sick Leave

Agencies become obligated to pay an employee for sick leave when:

• The employee earns the time off
• The sick leave is made available to the employee
  –AND–
• It is more likely than not that the benefit will be used

Although the entire benefit might not be used if the employee does not become ill or otherwise meet the requirement for use, it is made available to the employee because of past service.

Employees accrue sick leave each month and the entire balance carries over (without limits) at each fiscal year-end. However, unused leave is not paid upon termination of employment. Such leave is attributable to services already rendered because employees earn a certain number of hours for each month that they are employed. Therefore, unused amounts of accrued sick leave are forfeited upon termination of employment.

Sick leave accrued by an employee can be used only when the employee is sick, has a doctor appointment, or the employee must care for a family member. Unused sick leave accumulates because the entire balance carries over at the end of each fiscal year.

For financial accounting and reporting purposes, sick leave taken comes first out of hours earned in the current reporting period, Last-In First-Out (LIFO) flows assumption, with calculations made at fiscal year-end. If the sick leave balances are increasing, that means the employees are not using all the hours earned that fiscal year. If this happens year-over-year at the agency level, the balances continue to increase. Under LIFO, the employee uses the hours earned in the current fiscal year before using the accumulated balance from years past. If hours used do not exceed hours earned in the current fiscal year, no liability is recognized. However, if the sick leave liability decreases in a fiscal year because employees use more leave than is accrued for that fiscal year, a liability is calculated and recognized.

Upon termination from state employment, all sick leave balances are forfeit. This is not considered a reduction in liability — it is an adjustment to the leave balance and must not be recognized in any sick leave liability.

Sick Leave Liability Calculation Methodology

An analysis must be done each reporting period to determine if a liability needs to be recognized. The Comptroller’s office performs an annual analysis for agencies that use CAPPS HR/Payroll. Each audited agency and any agency that does not use CAPPS HR/Payroll is required to do its own annual analysis using its sick leave data. These agencies must estimate how much of the leave is more likely than not to be used as sick leave and recognize that portion as a current liability for compensated absences.

• 20X0 – No liability is recognized because all sick leave used was from the current year.
• 20X1 – No liability is recognized because all sick leave used was from the current year.
• 20X2 – A liability of $8,000 is recognized because more sick leave was used that the employees accrued. The employees are now using sick leave from prior years.
• 20X3 – A liability reduction of $8,000 is recognized to offset the liability recorded in 20X2 This is due to the employees are now using current year’s additions.
• 20X4 – No liability recognized because all sick leave used was from the current year.

If a liability or reduction is recognized, use the USAS guidance below. If the entry is for a liability reduction, use the R indicator.

The following is an example of the governmental fund entry.

Accounting effect of above entries:

The following is an example of the proprietary funds entry.

* Note: Using T-codes 646/646 generates an automatic reversal in the following fiscal year using T-codes 660/661.

Accounting effect of above entries:

Annual Financial Report Working Papers are available under Long-Term Liability Basis Conversion category to assist in preparation of the governmental fund (FT12) journal entries.

Other Compensable Leave Types

If the leave is not attributable to a specific employee as of the date of the annual financial report (for example, if leave was donated to a shared employee leave pool), the agency must measure the liability using an estimated pay rate that represents the eligible employee population.

Salary-Related Payments

GASB 101 requires agencies to include a liability for Medicare and Social Security taxes.

• The portion of the liability for salary-related payments must be measured using the salary rates in effect as of the date of the financial statements.
• Changes to the measurement of the portion of the liability for salary-related payments in future reporting periods due to a change in salary or tax rates must be recognized in the reporting period of the change.

The Comptroller’s office calculates this amount for unaudited agencies using CAPPS for payroll. All audited agencies and any agency that does not use CAPPS HR/Payroll are required to do their own calculations using their sick leave data.

Universities and university systems that provide benefits through a defined contribution pension plan (like optional retirement programs [ORP]) are required to make employer contributions related to leave used for time off but not for leave paid upon termination of employment. The amount that is incrementally associated with the recognized leave reflects the amount of employer contributions related to the portion of the leave that is more likely than not to be used for time off. Universities have the discretion to include material amounts of ORP in the liability calculation or not.

Liability Calculation Criteria

• If the amount of overtime leave accrued during the current reporting period is greater than the fiscal year-end balance, the current liability is equal to the fiscal year-end balance. The noncurrent is the fiscal year-end balance minus the current liability.
• If the amount of overtime leave accrued during the current reporting period is less than the fiscal year-end balance, the current liability is equal to the leave accrued during the year. The noncurrent liability is the fiscal year-end balance minus the current liability.

Liability Calculation Examples:

Example 1:

The employee has 23 years of service and can accrue 15 hours of annual leave per month. The employee used 120 hours of annual leave during the current year and had a beginning balance of 300 hours and a fiscal year-end balance of 360 hours. The employee’s salary rate is $35 per hour.

Example 2:

The employee has 6 years of service and can accrue 10 hours of annual leave per month. The employee used 64 hours of annual leave during the current reporting period and had a beginning balance of 59 hours and a fiscal year-end balance of 115 hours of annual leave. The employee’s salary rate is $12 per hour.

Example 3:

The employee earned 60 hours of unpaid overtime during the reporting period and used 160 hours of overtime as comp time. The employee had a beginning balance of 200 hours and a fiscal year-end balance of 100 hours. The employee’s pay rate is $12 per hour.

COBJs that can be used for the following entries are:

• 7001 – Salaries and Wages – Line Item Exempt Positions
• 7002 – Salaries and Wages – Classified and Non-classified Permanent Full-time Employees
• 7003 – Salaries and Wages – Classified and Non-classified Permanent Part-time Employees
• 7004 – Salaries and Wages – Classified and Non-classified Non-permanent Full-time Employees
• 7005 – Salaries and Wages – Classified and Non-classified Non-permanent Part-time Employees
• 7006 – Salaries and Wages – Hourly Full-time Employees
• 7007 – Salaries and Wages – Hourly Part-time Employees
• 7008 – Higher Education Salaries – Faculty/Academic Employees
• 7009 – Higher Education Salaries – Faculty/Academic Equivalent Employees
• 7010 – Higher Education Salaries – Professional/Administrative Employees
• 7011 – Higher Education Salaries – Extension – Professional/Administrative Employees
• 7014 – Higher Education Salaries – Student Employees
• 7015 – Higher Education Salaries – Classified Employees
• 7016 – Salaries and Wages – Employees Receiving Twice-a-month Salary Payment
• 7017 – One-time Merit Increase
• 7018 – Hardship Stations Pay
• 7019 – Compensatory Time Pay
• 7020 – Hazardous Duty Pay
• 7021 – Overtime Pay
• 7022 – Longevity Pay
• 7023 – Lump Sum Termination Payment
• 7024 – Termination Pay – Death Benefits
• 7025 – Compensatory or Salary Per Diem
• 7028 – Productivity Bonus Awards
• 7031 – Emoluments and Allowances
• 7032 – Employees Retirement – State Contribution
• 7035 – Stipend Pay – Revised
• 7037 – Incentive Award for Authorized Service to Veterans – Revised
• 7041 – Employee Insurance Payments – (Employer Contribution)
• 7043 – FICA Employer Matching Contribution
• 7046 – Food Stamp Bonus Pay
• 7047 – Recruitment and Retention Bonuses
• 7048 – Performance Rewards
• 7050 – Benefit Replacement Pay
• 7051 – Severance Pay

The following is an example of the governmental funds entry.

Accounting effect of above entries:

Annual Financial Working Papers are available under the Long-Term Liability Basis Conversion and BTA Working Papers section to assist in the preparation of the governmental fund (FT12) and proprietary fund (FT05) journal entries.