Restructuring activities prior to a reporting entity entering bankruptcy may involve terminating employees in an effort to improve profitability and liquidity. A reporting entity may also modify or terminate employee stock compensation awards.

2.3.1 Termination benefits (pre-bankruptcy)

The recognition of costs for employee terminations is affected by the type of termination as well as any future service requirements associated with termination benefits to be paid. For example:
  • Employee terminations may be voluntary or involuntary
  • Termination benefits may be one-time benefits or provided pursuant to an existing arrangement
  • Termination benefits may be individually negotiated or determined for a group
  • Termination benefits may be vested or may include a future service requirement as a result of the terminating event
Because different types of termination arrangements may fall within the scope of various sections of the ASC with differing measurement and reporting criteria, it is important to understand the guidance that applies in the specific situation. ASC 420, Exit or Disposal Cost Obligations, provides guidance on one-time employee termination benefits. ASC 712-10-25 provides guidance on contractual termination benefits, special termination benefits, and other post-employment benefits.

2.3.2 Equity-based compensation awards (pre-bankruptcy)

In addition to termination benefits, an entity may also modify stock compensation awards to retain employees through the bankruptcy proceedings. Equity-based award modifications follow the guidance in ASC 718, Compensation – Stock Compensation. This guidance is also applicable to cancellations of equity-based awards, which is another common occurrence prior to an entity entering bankruptcy. See SC 4 for further information about equity-based award modifications and cancellations.
Accounting for nonemployee awards is also subject to ASC 718. See SC 7 for further information about stock-based transactions with nonemployees.

2.3.3  Pensions/other post-employment benefits (pre-bankruptcy)

Companies progressing toward a bankruptcy filing should  evaluate whether any significant events have occurred that would require a remeasurement of pension or other post-employment benefit obligations. For instance, restructuring activities could result in a plan curtailment, settlement, or significant benefit plan amendment. See PEB 4 for  information on pension plan amendments, curtailments and settlements.
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