The impacts of COVID-19 have caused many private companies and organizations to restructure, pivot their operations, and, in some cases, exit certain business activities, product lines, or operating facilities. As a result, exit and disposal costs may be incurred which must be accounted for in accordance with FASB ASC 420, Exit or Disposal Cost Obligations. As we approach another calendar year-end in the midst of a pandemic, management should consider if they have incurred exit and disposal costs falling under the scope of ASC 420, and if these costs were recorded in accordance with the standard.
As a refresher, we summarized the key accounting guidance for exit and disposal costs below.
Basics of ASC 420
- Common exit and disposal costs within the scope of ASC 420:
- One-time employee termination benefits
- Costs to terminate an operating lease prior to the adoption of FASB ASC 842, Leases
- Costs to terminate a non-lease contract (i.e. service contracts)
- Costs to consolidate facilities or relocate employees
- Other exit or disposal costs associated with restructuring, discontinued operations, and costs to the acquired entity in a business combination
- Recognition of exit and disposal costs under ASC 420:
- A liability for a cost associated with an exit or disposal activity should be recognized at its fair value in the period in which the liability is incurred.
- A liability for a cost associated with an exit or disposal activity is incurred when a transaction or event occurs that leaves an entity little or no discretion to avoid the future transfer or use of assets to settle the liability.
- If an entity has an exit or disposal plan in place, that by itself does not create an obligation to others for costs expected to be incurred under the plan; thus, this plan or commitment is not the requisite past transaction or event for recognition of a liability.
Considerations When Applying ASC 420
- Termination benefits within the scope of ASC 420 (e.g. severance pay, counseling, outplacement training) are provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract. These are the one-time termination benefits incurred that are not part of a plan already in place.
- Costs associated with an exit or disposal activity involving a discontinued operation shall be included within the results of discontinued operations in accordance with Section 205-20-45.
- Recognition of an exit or disposal liability at fair value under FASB ASC 420 differs from the liability recognition rules for loss contingencies under FASB ASC 450-20, Contingencies: Loss Contingencies, which is based on a recognition model that is not meant for liabilities initially measured at fair value.
- Disclosure requirements for material exit and disposal activities include disclosing where the aggregated costs are recorded on the income statement, reconciliation of the related liability from beginning to end of the period, and current and cumulative amounts of significant types of exit and disposal costs.
Certain situations or transactions in the context of exit and disposal activities can be tricky to sort through, and may require a deeper dive into the technicalities of ASC 420. Please reach out to our auditors if your business or organization needs additional guidance in this area.