GASB 101 Podcast Series – Part Four: Journal Entries, Disclosures, and Go-Forward Training

CHRISTIAN FUELLGRAF: Welcome, and thanks for listening to Cherry Bekaert's 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.

CHRISTIAN FUELLGRAF: 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. We've reached the end of our four-part series on GASB 101 compensated absences implementation.

DANNY MARTINEZ: I'm your host, Danny Martinez, advisory partner for Cherry Bekaert. I lead our national team of accounting advisors that help with ACK for preparation, financial close, and audit preparation. Of course, today we're discussing implementation of new accounting standards, which this year is GASB 101 compensated absences.

DANNY MARTINEZ: We're ending our four-part series the way we started, with Scott Anderson. Most listeners know Scott, but for any new listeners, Scott, will you please introduce yourself?

SCOTT ANDERSON: Sure. I'm Scott Anderson. I've been with Cherry Bekaert for 20 years. I've done a number of these podcasts with Danny, we also do webinars, and I do a little audit and a little advisory work. I spent a couple of years at the GASB, and I enjoy discussing the intricacies of GASB pronouncements.

DANNY MARTINEZ: Thank you. As we sit here in late March, we started this series at the turn of the year, and in working with clients and talking at conferences, we are much further down the road than in January. Many are mid-implementation, especially those with June 30 year ends.

DANNY MARTINEZ: The early group started right after W-2s and 1099s in February, but many are getting going now. I recently presented on this topic at NASACT, and the states there were discussing implementation. They had worked through understanding the guidance and identifying the completeness of the population, and they were close to preparing the journal entries, which is our main topic today.

DANNY MARTINEZ: The fourth phase in our Cherry Bekaert four-phase implementation is journal entries, disclosures, and go-forward. That's what we'll cover today. Scott, first question: when implementing this guidance, will governments have to restate their financial statements, and what will that look like?

SCOTT ANDERSON: The answer is: it depends. Some governments will have to restate; some will not. It depends on existing policies.

SCOTT ANDERSON: GASB 101 was an update, not a radical change. Depending on the type of compensated absence a government offers and its employment policies, a government could see no impact. Where we expect to see a restatement is when a government never recognized a liability for sick leave because it was not paid out upon separation of service. Now the government must assess the likelihood that that leave will be paid out or used during employment.

SCOTT ANDERSON: That creates a new liability that wasn't previously carried. Adding a new liability requires an offsetting entry. You are not going to expense the entire liability in the current period, so it would result in a restatement of the beginning net position.

DANNY MARTINEZ: What's different for governments that have comparative financial statements?

SCOTT ANDERSON: Like any change in accounting principle, as prescribed by GASB 100, this is a change in accounting principle requiring retroactive implementation. You would restate the earliest period presented, so comparative financial statements would show the new liability in both years. You would recognize the expense relating to those years, which results in a restatement of beginning net position of the earliest year presented.

DANNY MARTINEZ: That's a good point: it depends. This pronouncement will vary government by government based on the type of compensated absences, termination policies, and employment policies. Journal entries will differ accordingly, which is why this is phase four.

DANNY MARTINEZ: For listeners who missed earlier episodes, check the second podcast in our series for identifying compensated absences completeness, and the third podcast for policies and procedures that impact recognition and measurement, which lead to the journal entries. Once you've done that and feel confident, whether you need to recognize sick leave or things remain largely the same, you'll want to build your entries.

DANNY MARTINEZ: When building the actual entries, what options does the government have?

SCOTT ANDERSON: Most governments already have a compensated absence liability. If you have employees, there will be compensated absence liability. There is already a calculation done each year; the difference is that it may not include sick leave.

SCOTT ANDERSON: It's reasonable to start with the previous calculation and build on top of it by adding sick leave. A nuance with sick leave is the probability assessment. If you calculate by employee, add columns to assess probability, incorporate historical trends, and determine how likely they are to use the leave.

SCOTT ANDERSON: Some may want to start from scratch if they don't like their existing method. This is an opportunity to refresh and possibly implement a more efficient approach. So you can either build on the prior calculation or start anew.

DANNY MARTINEZ: That reminded me of a government that realized through GASB 101 they weren't recording compensated absences correctly pre-101, and now, as they implement 101, they're getting on the right side of GAAP.

DANNY MARTINEZ: On the advisory side, most people want to build on what they currently have, using their previous compensated absence calculation and layering on a principles-based approach, typically adding the more-likely-than-not calculation and the usage rate for leave, whether paid out or not.

DANNY MARTINEZ: Scott, when building these entries, what could make them more complex or harder to build from current practices?

SCOTT ANDERSON: You'll add new fields for probability and can be as precise as you want with those probability assessments. We strive for precision, but GASB did not prescribe a required level of detail.

SCOTT ANDERSON: Cherry Bekaert has our own calculation template, and I've seen templates from GFOA and other stakeholder groups such as NACUBO or state auditors. None of those templates are right or wrong; they are practice aids. The GASB specifically did not want to prescribe how you arrive at the calculation.

SCOTT ANDERSON: In the basis for conclusions, the GASB noted respondents requested guidance on assessing factors in paragraph 12, such as how long a historical trend should be. The board believed that specific requirements would limit governments' use of professional judgment, so detailed application requirements were not included.

SCOTT ANDERSON: You can get carried away trying to achieve unnecessary precision. The GASB illustrations walk through recognition and measurement concepts but do not prescribe the estimation method. My advice: don't overthink the calculation.

DANNY MARTINEZ: I agree. In tailored training, we show the balance you're dealing with on the financial statements and pull up the total amount of sick leave, especially for governments that don't pay out sick leave, to show the potential impact on liability if you booked all of it.

DANNY MARTINEZ: People can see that even if they take extreme positions on the more-likely-than-not calculation, the change to the financial statement balance may not be significant enough to justify excessive precision.

DANNY MARTINEZ: Also consider future years. Whatever you do this year, you'll likely have to replicate in fiscal years 26, 27, and 28. Aim for an approach that is easily repeatable and produces a reasonable compensated absence liability.

DANNY MARTINEZ: At NASACT, Alan Skelton, technical director at GASB, emphasized materiality. The GASB thinks about cost-benefit in terms of materiality. If you push beyond materially reasonable balances and incur substantial incremental cost, the GASB does not expect those extra costs to be justified. That was an interesting perspective for this pronouncement.

DANNY MARTINEZ: Scott, we've talked about journal entries. What about disclosures? What changes and what should people prepare for?

SCOTT ANDERSON: The GASB is thoughtful about disclosures. Historically, GASB 34 provided disclosure guidance for compensated absences as part of long-term liabilities: beginning balance, additions, disposals, maturities, ending balance, and current portion.

SCOTT ANDERSON: The GASB evaluated which disclosures were useful to users. They found users prefer net change information rather than detailed activity. GASB now allows netting activity as one item instead of disclosing additions and decreases separately.

SCOTT ANDERSON: The requirement to disclose the fund in which the liability is liquidated is no longer required. That disclosure is important under severe financial stress but not generally essential.

SCOTT ANDERSON: The basis for conclusions shows the GASB considered many other possible disclosures, such as employment policies or expected timing of retirements, but determined they were not sufficiently important relative to the cost of gathering the information.

SCOTT ANDERSON: The net effect: fewer disclosure requirements than before. You do not have to disclose more than you already did, you can net activity, and you no longer must disclose the fund in which the liability is liquidated.

DANNY MARTINEZ: Can you share what, if anything, governments might need to do to their summary of significant accounting policies and what they might need to disclose in the first year if they're restating under GASB 100?

SCOTT ANDERSON: The summary of significant accounting policies has always been required. Your accounting policy might change as a result of implementing GASB 101. For example, when assessing likelihood that leave will be used, you may need to disclose whether you use FIFO or LIFO for leave-flow assumptions. Those types of choices belong in the policy disclosure.

SCOTT ANDERSON: If you're restating in the first year, GASB 100 requires disclosure showing, in a tabular format, the reporting units that have been restated and the amounts. Because this is implementation of a new pronouncement, you don't have to disclose the reason beyond stating you're implementing GASB 101.

DANNY MARTINEZ: GASB 100 provides good examples of table formats for restatement disclosure. When we work with clients, we focus on three pieces: the summary of significant accounting policies language, the restatement disclosure, and refreshing the long-term liabilities disclosure.

DANNY MARTINEZ: The last step in our typical six- to eight-week engagement is recording a day-two training for the next year to document the implementation and help the team retain knowledge.

SCOTT ANDERSON: Being able to follow it next year is important. There is no prescribed way to calculate this, but you should do it consistently every year. You often have turnover, and you can't assume the same person will perform the calculation next year.

SCOTT ANDERSON: Having a video or written leave-behind documenting the calculation method and policy is helpful for the next person arriving at the same conclusion.

DANNY MARTINEZ: Next year, fiscal year 26, you can pull that back up in July 26 if you have a June year end and see what was done last year, especially if you worked with a third-party consulting firm. That resource is useful during the fiscal year 25 audit and helps cap off the implementation: start with tailored training and end with training for going forward.

DANNY MARTINEZ: Thank you again, Scott, for presenting and teaching on the journal entries and disclosures in phase four of implementation. To our audience, we continue to sign people up for our four-phase GASB 101 implementation solution. You can find the podcast for each phase wherever you get your podcasts.

DANNY MARTINEZ: We are also hosting a webinar in about two weeks on the seven must-knows for GASB 101 implementation. If that has already passed, a recorded version will be available on the Cherry Bekaert website.

DANNY MARTINEZ: If you have any questions on GASB 101, audit preparation, or other services, please email danny.martinez at cbh.com or scottanderson at cbh.com. You can also find us on LinkedIn.

DANNY MARTINEZ: Thank you, and we'll see you soon.

CHRISTIAN FUELLGRAF: This was Christian again.

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