A company's management, having the requisite authority, approves a detailed plan to close a manufacturing facility. The plan is communicated to the affected employees in sufficient detail for them to determine the type and amount of benefits they will receive if they stay through termination, and the company separately announces the closure publicly in a way that creates a clear expectation among employees, customers, and suppliers that the closure will proceed as planned. Under ASC 420, and separately under IAS 37, when is the resulting liability recognized?
- Under ASC 420, the termination-benefit liability is recognized only once its own specific criteria are met, management with the requisite authority approving the plan and communicating it to employees in sufficient detail, with other exit costs recognized separately as each is incurred; under IAS 37, once a detailed formal restructuring plan has been announced in a way that creates a valid expectation among those affected, the qualifying restructuring costs, including such termination benefits, are generally recognized together at that time
- Under IAS 37, no restructuring liability may ever be recognized before the termination benefits are actually paid out in cash to employees, while ASC 420 recognizes the entire restructuring liability the moment management first begins internally considering the plan
- Both frameworks require the entire restructuring cost, including termination benefits and every other exit cost, to be recognized together only once every individually affected employee has signed a written acknowledgment of the plan
- Under ASC 420, the restructuring liability is recognized the moment any public announcement is made to any party, while IAS 37 requires waiting until all of the related costs have actually been paid in cash
Why A? And why not the others?
Correct answer: A. Under ASC 420, the termination-benefit liability is recognized only once its own specific criteria are met, management with the requisite authority approving the plan and communicating it to employees in sufficient detail, with other exit costs recognized separately as each is incurred; under IAS 37, once a detailed formal restructuring plan has been announced in a way that creates a valid expectation among those affected, the qualifying restructuring costs, including such termination benefits, are generally recognized together at that time
ASC 420 requires each element of a restructuring cost to satisfy its own specific recognition criteria: a liability for one-time termination benefits is recognized once management with the appropriate level of authority has approved the plan and communicated it to employees in sufficient detail that they can determine the type and amount of benefits they will receive, while other exit costs, such as contract termination costs, are recognized separately as each is actually incurred, which often spreads recognition across several periods. IAS 37 instead asks whether a detailed formal restructuring plan has been announced in a way specific enough to create a valid expectation among those affected, employees, customers, and suppliers alike, that the entity will carry out the restructuring; once that constructive obligation arises, the qualifying restructuring costs, including comparable termination benefits, are generally recognized together as a single provision at that time rather than piecemeal as each cost is incurred. The option describing IAS 37 as waiting for actual cash payment and ASC 420 as recognizing everything the instant management merely starts considering the plan is wrong because it misstates both standards' actual triggers, which are the valid-expectation-creating announcement under IAS 37 and the specific communication-to-employees criteria under ASC 420, not cash payment or mere internal deliberation. The option requiring individual written employee acknowledgments under both frameworks is wrong because neither standard conditions recognition on employees personally signing anything. The option describing ASC 420 as triggered by any public announcement to any party is wrong because ASC 420's termination-benefit trigger is specifically communication to the affected employees in sufficient detail, not a general public announcement.
Source: FASB Accounting Standards Codification ASC 420-10-25 (recognition criteria for one-time termination benefits, communication date); IFRS Foundation, IAS 37 Provisions, Contingent Liabilities and Contingent Assets, paragraphs 72 and 78 (constructive obligation for restructuring arising from a detailed formal plan and valid expectation)