Reporting Requirements for Annual Financial Reports of State Agencies and Universities

Notes & Samples

NOTE 5 – Long-Term Liabilities
Employee Compensable Leave

GASB Statement No. 101, Compensated Absences, requires that liabilities for compensated absences be recognized for unused leave and leave that was used but not yet paid in cash or settled through noncash means. A liability must be recognized for unused leave if the leave:

• Is attributable to services already rendered
• Accumulates
  –AND–
• Is more likely than not (50% or more) to be used for time off or otherwise paid in cash or settled through noncash means

A compensated absence is leave for which employees may receive one or more of the following:

• Cash payments when the leave is used for time off
• Other cash payments (such as payment for unused leave upon termination of employment that include voluntary resignation or retirement)
• Noncash settlements (such as conversion to defined benefit postemployment benefits)

Compensated absences generally do not have a set payment schedule.

Leave is attributable to services already rendered when an employee has performed the services required to earn the leave. Examples of compensated absences include:

• Vacation (or annual) leave
• Sick leave
• Compensatory time
• Holidays
• Parental leave
• Military Leave
• Bereavement leave
• Certain types of sabbatical leave
• Other types of leave

An agency must evaluate whether leave is more likely than not to be used for time off or otherwise paid in cash or settled through noncash means by assessing relevant factors, including the following:  

• The state’s employment policies related to compensated absences
• Whether leave that has been was earned is (or will become) eligible for use or payment in the future
• Historical information about the use, payment or forfeiture of compensated absences
• Information known to the agency that would indicate that historical information may not be representative of future trends or patterns

GASB 101 supersedes GASB Statement No. 16, Accounting for Compensated Absences, and does not apply to benefits that are within the scope of GASB Statement No. 47, Accounting for Termination Benefits, as amended.

Notes to the Financial Statements

GASB 101 amends the existing requirement to disclose the gross increases and decreases in a compensated absences liability to allow the agency to disclose only the net change, if it is identified as the net amount. In addition, agencies are no longer required to disclose which governmental funds have been used to liquidate the compensated absences liability.

Agencies must report changes adopted at transition to conform to the provisions of GASB 101 as a change in accounting principle in accordance with GASB Statement No. 100, Accounting Changes and Error Corrections, including the related display and disclosure requirements.

Sick Leave

Employees accrue sick leave from the first day of employment through the last day of attendance at work. A full-time employee accrues eight hours of sick leave on the first day of each month worked. There is no limitation on the amount to be carried forward into the next fiscal year. Once employment is terminated with the state of Texas, the employee is not entitled to payment for any sick leave accrued.

Sick Leave Flows Assumption

Sick leave liability is based on a more likely than not probability. If any part of the leave balance is more likely than not to be used or paid out in the future, it is recognized as a liability. However, GASB 101 does not provide any guidance about how to determine the more likely than not portion of sick leave. Professional judgement must be used to determine whether leave taken comes from the:

• Beginning leave balance, First-In First-Out (FIFO)
• –OR–
• Leave earned during the reporting period, Last-In First-Out (LIFO)

Either is allowed under GASB 101— therefore, it is an accounting policy decision.

For financial accounting and reporting purposes, leave taken comes first out of hours earned in the current reporting period, LIFO flows assumption, with calculations made at the end of the reporting period. Under LIFO the employee uses the current reporting period hours earned before using the accumulated balance from prior fiscal years. If hours used do not exceed hours earned in the current reporting period, no liability is recognized. However, if there is a year where the sick leave liability decreases because employees use more leave than is accrued for the current reporting period, a liability is calculated and recognized.

The Comptroller’s office performs an annual analysis 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 annual analysis using their sick leave data.

For more information, see Compensable Leave Liability Methodology.

Other Compensable Leave Types

Other employee compensable leave liabilities are reported separately as both current and non-current in the statement of net position. Enter a brief description of the employee compensable leave liability in the Note Disclosure field of the LTLN web application. Classification of leave liabilities into current and non-current amounts mandates a calculation methodology rather than an averaged rate multiplied by the total ending leave balance at fiscal year-end.

Payroll Report for Compensable Leave

Compensable leave reports can be run from CAPPS or the agency’s internal accounting system. These reports provide the current and noncurrent liability amounts for compensable leave for agencies. The CAPPS report does not include amounts for Social Security and Medicare taxes. The current tax rate for Social Security is 6.2% and Medicare is 1.45% for the employer. To add both taxes to the compensable leave report, multiply the amounts by 7.65%.

The beginning balance may not always match the ending balance from the prior fiscal year due to differences in how beginning balances are calculated in CAPPS or the agency’s internal accounting system. For example, if an employee’s last day of service is Aug. 31, 20PY, the leave balances for that employee are not included in the beginning balance for the next fiscal year’s report.

Since the current fiscal reporting period beginning balance must tie to the prior fiscal year’s ending balance, any differences between these two amounts must be included in the adjustments column of the Changes in Long-Term Liabilities table in Note 5.

Annual Leave

Annual leave (commonly referred to as vacation leave) and other compensated absences with similar characteristics are accrued as a liability when the benefits are earned by the employee if both:

• The employee’s rights to receive compensation are attributable to services already rendered
  –AND–
• It is more likely than not the employer will compensate the employee for the benefits through paid time off or some other means (such as cash payments at termination or retirement)

Overtime and Compensatory Leave for FLSA Non-Exempt and Exempt Employees

Under the federal Fair Labor Standards Act and state laws, overtime can be accumulated in lieu of immediate payment as compensatory leave for non-exempt, non-emergency employees up to a maximum of 240 hours. All overtime exceeding 240 hours must be paid with the next regular payroll. Upon termination or death, all overtime balances must be paid in full. For emergency personnel (firefighters, law enforcement, corrections officers, etc.), overtime can be accumulated up to a maximum of 480 hours. Unpaid overtime must be included in the calculation of current and long-term liabilities because each employee may be paid for the overtime or use it as compensatory time.

Compensatory leave is allowed for exempt employees who are not eligible for overtime pay. This leave is accumulated on an hour-for-hour basis and must be taken within one year from date earned or it lapses. Legislative agencies only lapse compensatory time at the end of even numbered fiscal years. There is no death or termination benefit for compensatory leave and it is non-transferable. For these reasons, this category is reported as a current liability.

Sabbatical Leave

Sabbatical leave during which an employee is not required to perform any significant duties for the institution of higher education (unrestricted sabbatical leave) is a compensated absence. Sabbatical leave during which an employee is required to perform duties of a different nature (for example, research instead of teaching) is not a compensated absence.

Sporadic Leave

Agencies must not recognize a liability or types of compensated absences that are dependent upon the occurrence of a sporadic event that affects a relatively small proportion of employees in any fiscal year until the leave commences. These events include:

• Parental leave
• Military leave
• Jury duty

However, agencies must recognize events that meet the requirements for recognizing a liability. These events include:

• Sick leave
• Unrestricted sabbatical leave

Salary-Related Payments

Salary-related payments are obligations that an agency incurs related to providing leave in exchange for services rendered. These salary-related payments are direct and incrementally associated with leave must be analyzed for consideration to include them in the liability calculation when the leave has not been used. These salary-related payments include:

• Payroll taxes
• Employer contributions to defined contribution postemployment plans

For example, defined contribution payments (like optional retirement programs [ORP]) are paid for leave used for time off but not for leave related to termination.

For unused leave that is deemed material, the expense for the salary-related payments for defined contribution plans (like ORP) must be:

• Recognized when the liability is recognized
  –AND–
• Reported as pension or OPEB expense.

For used leave that is deemed material, the expense for salary-related payments related for defined contribution pensions or defined contribution OPEB must be included in a pension liability or an OPEB liability in accordance with the requirements of GASB 68, GASB 73 or GASB 75, as amended.

Comptroller’s Office Methodology for the Liability Calculation

Agencies must report a liability when leave is used for time off but has not yet been paid in cash or settled through noncash means. That liability must be measured at the amount of the cash payment or noncash settlement to be made for the use of the leave. Calculate the compensable leave liability based on the employee’s pay or salary rate in effect as of the balance sheet date. Salary-related payments related to defined benefit pensions or Other Postemployment Benefits (OPEB) defined benefit plans must not be included in the measurement of liabilities for compensated absences.

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