GASB 101 Podcast Series – Part One: Defining GASB 101 and the First Phase of Implementation

CHRISTIAN FUELLGRAF: Welcome and thanks for listening to the Cherry Bekaert government and public sector podcast series. In each episode, we hear from the best in the business on the latest challenges, trends, and opportunities affecting the government and public sector.

I'm Christian Fuellgraf, leader of Cherry Bekaert’s government and public sector industry team. I hope you enjoy, and thank you for joining us.

DANNY MARTINEZ: Hello everyone and thank you for joining today. Today is the first part of our four-part series on GASB 101, compensated absences implementation.

I'm your host, Danny Martinez, Advisory Partner at Cherry Bekaert. I lead our national team that provides government accounting assistance in a variety of ways to help accounting and financial reporting teams move from dealing with urgent issues to focusing on strategic, big-picture items for their constituents.

We are going to have four guests on this series as we walk through the four phases of implementation for GASB 101. We are starting with the legend himself, "Mr. GASB" as we like to call him, Scott Anderson. Welcome again, Scott. Would you please introduce yourself to our new listeners?

SCOTT ANDERSON: Thanks, Danny. I'm glad to be here. I feel like the "Mr. GASB" title has been taken by somebody else, but I'll answer to it.

I've been with the firm for 20 years. I am in our North Carolina practice, though I was previously in Florida. I spent a couple of years at the GASB as a practice fellow during the pandemic.

I returned to Raleigh a couple of years ago. I oversee our technical efforts on the audit government practice and also help Danny with our Advisory group.

DANNY MARTINEZ: Maybe Captain GASB? I don't know if Captain GASB is taken.

SCOTT ANDERSON: I'll take Captain GASB. That sounds better anyway.

DANNY MARTINEZ: All right, so we will be walking through here with Captain GASB. I'm going to take a minute to set the stage and give you an idea of where we're headed with this four-part series.

GASB 101, Compensated Absences, is effective for fiscal years ending December 31, 2024. As we sit here in early 2025, the calendar year-end governments and those with June 30, August 31, or September 30 year-ends should all be thinking about implementation if they haven't yet.

This guidance refreshes the GASB's compensated absence guidance from the 1990s. There have been changes to the types of compensated absences offered by governments since that original guidance was introduced.

This standard has been rated to have a moderate level of effort for the implementation impact by the GASB. This is important because for all new accounting pronouncements identified by the GASB as having a moderate or high level of effort, we here at Cherry Bekaert provide a four-phase implementation approach.

This approach leads you from having no clue what the pronouncement is about to being fully implemented. It ensures you have a plan to address the accounting for the implementation year and going forward.

In each part of this series, we will unpack one of those four phases related to our implementation methodology. In this installment, we are covering the first phase: Understanding the Standard.

Within the "Understanding the Standard" umbrella, there are a couple of aspects we touch on. In phase two, we will talk about completeness and compensated absence identification.

Phase three will touch on policy and procedure updates, as well as how to document your work in an implementation memo for a smooth audit. Lastly, phase four covers journal entries, disclosures, and go-forward training.

Before we get into the specifics of phase one, we want to set the table for our audience that is perhaps jumping into GASB 101 for the first time in this new year. Scott, can you help us understand what a compensated absence is?

How is it defined in GASB 101, and at a high level, how is the accounting and financial reporting changing from current guidance?

SCOTT ANDERSON: First, as you mentioned, GASB 16 was issued in early 1992. The intent of this new guidance was not to overhaul the old guidance, but rather to reset it and apply the conceptual framework that is now in place.

When GASB 16 was issued, only Concept Statement 1 existed. None of the other concept statements were in place. Concept Statement 4 impacts liability recognition the most and was released in 2007.

In light of those concept statements, it was necessary to see whether the guidance on compensated absences had a conceptual basis. The definition in the old standard stated that compensated absences are absences for which employees will be paid, such as vacation, sick leave, and sabbatical leave.

While that definition is simple, it is a bit limiting. The new definition states that a compensated absence is leave for which employees may receive one or more cash payments when the leave is used for time off, other cash payments (such as payment for unused leave upon termination), or non-cash settlements.

Non-cash settlements include things like conversion to defined benefit post-employment benefits. The new definition acknowledges a compensated absence does not always result in an absence; an employee does not have to take time off to reap the benefits.

Additionally, it is not necessarily paid out in cash and can be settled through other means. That definition is intentionally broader to cover any possible scenario.

There are some arrangements that could meet the definition of a compensated absence but will not result in a liability. The guidance provides recognition criteria to determine if a compensated absence results in a liability for a government.

These three criteria are: leave attributed to services already rendered, leave that accumulates, and leave that is more likely than not to be used for time off or otherwise paid in cash or settled through non-cash items. This is more of a principle-based approach rather than the rules prescribed in GASB Statement 16.

DANNY MARTINEZ: If you are looking into GASB 101 and have the pronouncement in front of you, you will want to go to paragraph nine for those three items Scott mentioned for recognition. Also, if you are playing GASB terminology bingo, Scott used the term "Concept Statement" in that first answer.

From a practical level, we are approached at conferences all the time by people asking what they really need to be concerned about. How will they know if they will see a big change in their liability balance, or if it is just business as usual?

Some governments that early implemented said it was a piece of cake, while others said it was very difficult. How would a government just digging into this know if they could have a big change in that liability balance?

SCOTT ANDERSON: I will answer this from an auditor's perspective. It makes me nervous as an auditor when I hear a government say they have already implemented it and it was a piece of cake.

Everyone should be concerned about this standard, even if it does not result in a change in your liability, because you want to be able to support why it did not change. Those who will see the biggest change are those who, in the past, have never recognized sick leave.

Vesting was a criterion in GASB 16. If sick leave was not paid out upon termination, governments would not recognize the liability. That changes now, as vesting is not a criterion for recognition.

Instead, you apply a "more likely than not" threshold that it will be used during employment. The other change is the threshold itself. "Probable" was used in GASB Statement 16, whereas "more likely than not" is used in Statement 101.

Some practitioners believe "probable" is a high threshold, perhaps 80% to 90%, and it was not very well defined. "More likely than not" is a firmer threshold.

I have also seen some governments include retirement contributions as part of accrued compensated absences. There has always been an implementation guide question and answer stating you should not include contributions to defined benefit post-employment plans. This guidance is now very explicit that you should not include those in your liability.

DANNY MARTINEZ: As we think about this first phase, "Understanding the Standard," there are really two areas where we provide assistance. The first is customized training with GASB 101 that we bring to a client's implementation team.

Why do you think this customized training is so important for the client's team to have before they go into implementation?

SCOTT ANDERSON: An effective system of internal control contemplates ongoing compliance with GAAP. If you do not understand the current GAAP, it is hard to say you have effective internal control. Understanding the provisions in GAAP is important even if it is not going to impact you.

DANNY MARTINEZ: No matter how often you talk about the idea of vesting not automatically meaning recognition, it remains a factor to contemplate in terms of the "more likely than not" threshold. I think training where you can show how we see that in the guidance is super important.

SCOTT ANDERSON: We do webinars, podcasts, and speak at the GFOA. There is plenty of content out there. One of the things we do at Cherry Bekaert that helps with these implementations is customized, one-on-one training.

This is more of a workshop situation where we can talk through your specific situations. We have received a lot of positive feedback when we have done these types of trainings for new GASB implementations.

DANNY MARTINEZ: With the workshop basis, we can slow down and take the time to work with the implementation team. We can answer questions thoroughly while pulling up their ACFR or personnel policy. I think that provides significant value.

This understanding is even more important at a system or state level where you have multiple payroll or HR departments that roll up into the same financial statement. This also happens with component units.

Can you share what Cherry Bekaert does in this phase to help with communication in those instances?

SCOTT ANDERSON: We can take on the role of the go-between and help in the communication to decentralized finance departments that have to roll up. We can help with the messaging and help consolidate the accounting policies described in the note disclosures.

It is important when you have decentralized departments with their own HR policies to have a consistent application and interpretation of the new pronouncement.

DANNY MARTINEZ: This avoids issues on the back end where people might be thinking about things differently or missing certain items. Getting everyone on the same page is always helpful.

We will stop there to keep this around the 15-minute mark. That covers phase one. Thank you again, Captain GASB, for taking time today to discuss phase one, "Understanding the Standard."

To our listeners, we hope you continue this journey with us over the next two months as we work through the four phases of implementation. If you want to dig into phases two, three, and four now, we are signing people up for our four-phase GASB implementation solution.

If you want to hear about the phases or sign up for custom training, please email me at danny.martinez@cbh.com. You can also message me on LinkedIn.

You can find Scott Anderson at s.anderson@cbh.com or on LinkedIn. Thank you for your time, and we will see you next time.

CHRISTIAN FUELLGRAF: This is Christian again. I hope you enjoyed this episode and look forward to our next one. Don't forget to subscribe.