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S-X 5-02.20 and S-X 5-02.24 require reporting entities to separately state on the balance sheet or in the footnotes any item in excess of 5% of total current liabilities, or 5% of total liabilities not otherwise addressed by the specific categories of S-X 5-02. Given the broad definition of accruals and other liabilities, this section captures the more common disclosure considerations related to accruals and other liabilities, and provides an interpretation of certain specific disclosure requirements.

11.4.1 Dividends payable

See FSP 5 for presentation and disclosure considerations related to dividends payable and stock dividends.

11.4.2 Income taxes

See FSP 16 for presentation and disclosure considerations related to income taxes.

11.4.3 Employee benefits

Employee benefits is a broad topic and includes a number of subtopics. Subtopics covered within this guide include:

11.4.3.1 Compensated absences

ASC 710, Compensation, requires an employer to accrue a liability, considering anticipated forfeitures, related to employees’ compensation for future absences if all of the following criteria are met:
  • The employer’s obligation relating to employees’ rights to receive compensation for future absences is attributable to services already rendered by the employee
  • The obligation relates to rights that accumulate or vest
  • Payment is probable
  • The amount of payment is reasonably estimable
In certain instances, a reporting entity may have to disclose a liability even if it has not yet been recorded. ASC 710-10-50 requires a reporting entity to disclose compensated absences if the employer meets the first three criteria listed above, but the amount is not reasonably estimable.

11.4.3.2 Rabbi trusts

ASC 710 addresses the accounting for deferred compensation when a portion of an employee’s compensation (e.g., bonuses) is invested in the stock of the employer (or other securities) and placed in a “rabbi trust.” These invested assets are in the name of the employer and not the employee. Accordingly, the accounts of the rabbi trust should be consolidated with the accounts of the employer in the employer’s financial statements. Depending on the provisions of the plan, an employee might be allowed to immediately diversify their stock held in the rabbi trust into nonemployer securities or to diversify after a holding period; other plans do not allow for diversification. The deferred compensation obligation of such plans may be settled in (1) cash, by having the trust sell the employer stock (or the diversified assets) in the open market, (2) shares of the employer’s stock, or (3) diversified assets. Some plans restrict the manner of settlement to only delivery of the shares of the employer stock.
Assets held by the rabbi trust
Although placement of assets in a rabbi trust prevents the plan participants from being deemed to have constructively received the assets (thus deferring the taxation of that compensation), rabbi trusts are not protected from the general creditors of the reporting entity. Therefore, assets held in the rabbi trust are accounted for based on their nature like other investments held by the reporting entity.
Employer stock held by a rabbi trust should be classified and accounted for in equity in the consolidated financial statements of the employer in a manner similar to treasury stock (i.e., changes in fair value are not recognized). This presentation is required regardless of whether the deferred compensation obligation may be settled in cash, shares of the employer’s stock, or diversified assets.
Diversified assets held by a rabbi trust should be accounted for in accordance with the applicable US GAAP for the particular asset. For example, if the diversified asset is a debt security, that security would be accounted for in accordance with ASC 320, Investments—Debt Securities and classified as trading, available-for-sale, or held-to-maturity, depending on the nature and risks of the security.
Deferred compensation obligation
For plans that permit diversification or cash settlement at the option of the employee, the deferred compensation obligation should be classified as a liability and adjusted to reflect changes in the fair value of the amount owed to the employee. Changes in the fair value of the deferred compensation obligation should be recorded in the income statement, even if changes in the fair value of the assets held by the rabbi trust are recorded in other comprehensive income pursuant to ASC 320.
When diversification is not permitted and the deferred compensation obligation is required to be settled by delivery of a fixed number of shares of employer stock, the deferred compensation obligation should be classified in equity. Changes in the fair value of the amount owed to the employee should not be recognized in the rabbi trust liability.
For the EPS implications for rabbi trusts, see FSP 7.

11.4.4 Restructuring

ASC 420, Exit or Disposal Cost Obligations, addresses significant issues related to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities.

11.4.4.1 Presentation and disclosure - exit or disposal obligations

The FASB has specified certain classification requirements related to costs and reversal of liabilities that are often relevant for exit and disposal costs.
ASC 420-10 requires extensive disclosures in the footnotes in the period in which an exit or disposal activity is initiated and until that activity is completed. Disclosures related to one-time termination benefits are principally focused on the amount to be paid.
ASC 420-10-50-1 requires all of the following information to be disclosed in the footnotes. The disclosures required must be made in all periods, including interim periods, until the exit plan is completed.

Excerpt from ASC 420-10-50-1

  1. A description of the exit or disposal activity, including the facts and circumstances leading to the expected activity and the expected completion date
  2. For each major type of cost associated with the activity (for example, one-time employee termination benefits, contract termination costs, and other associated costs), both of the following shall be disclosed:
    1. The total amount expected to be incurred in connection with the activity, the amount incurred in the period, and the cumulative amount incurred to date
    2. A reconciliation of the beginning and ending liability balances showing separately the changes during the period attributable to costs incurred and charged to expense, costs paid or otherwise settled, and any adjustments to the liability with an explanation of the reason(s) why.
  3. The line item(s) in the income statement or the statement of activities in which the costs in (b) are aggregated
  4. For each reportable segment, as defined in Subtopic 280-10, the total amount of costs expected to be incurred in connection with the activity, the amount incurred in the period, and the cumulative amount incurred to date, net of any adjustments to the liability with an explanation of the reason(s) why
  5. If a liability for a cost associated with the activity is not recognized because fair value cannot be reasonably estimated, that fact and the reasons why.

The reconciliation footnote prescribed in ASC 420-10-50-1(b)(2) is intended to address potential concerns regarding the comparability of information, as well as to provide information that will aid users of the financial statements in assessing the effects of these activities over time. In addition, ASC 420-10-50-1(d) requires disclosure of the amount of costs incurred and expected to be incurred in connection with exit and disposal activities by reportable segment, for both the current period and cumulative amounts to date. In the event a reporting entity recognizes liabilities for exit costs and involuntary employee termination benefits relating to multiple exit plans, it should generally present separate information for each material individual exit plan.
If a liability for costs associated with an exit or disposal activity is not recognized when management commits to a restructuring plan, ASC 420 requires that a reporting entity disclose information regarding the costs the entity expects to incur in connection with those activities. This provides users of the financial statements with the necessary information to assess the effects of the activity, both initially and over time.
Each provision for asset write-downs and similar allowances should be disclosed separately and distinguished from provisions for restructuring charges. For example, amounts should be disclosed separately for write-downs of PP&E, intangible assets, inventory, litigation costs, and environmental clean-up costs. A reporting entity should be careful when grouping together exit and involuntary termination costs, as the SEC staff has often requested greater disaggregation and more precise labeling in the income statement line items and footnotes when reporting entities group these costs together.
Provisions and write-downs unrelated to a formal restructuring plan should be disclosed separately from those charges arising as a result of a discretionary exit decision.
Question FSP 11-1 addresses the classification of inventory markdowns due to restructuring activities.
Question FSP 11-1
How should the markdown of inventory be classified when it is due to activities taken in connection with a restructuring decision?
PwC response
As discussed in SAB Topic 5.P.4 (codified in ASC 420-10-S99-2), the SEC staff recognized that there may be circumstances in which a reporting entity might assert that inventory markdowns are costs directly attributable to a decision to exit or restructure an activity. However, given the difficulty in distinguishing inventory markdowns attributable to a decision to exit or restructure from those markdowns that are attributable to external market factors, the SEC staff has indicated that inventory markdowns should be classified in the income statement as a component of costs of goods sold.

The SEC staff has also indicated that reporting entities should evaluate restructuring liabilities at each balance sheet date (annual and interim) to ensure that unnecessary amounts are reversed in a timely manner. Disclosure should be provided when material reversals are made. A reversal of a liability should be recorded in the same income statement line item that was used when a liability was initially recorded. Amounts determined to be in excess of those required for the stated restructuring activity may not be used for other payments. The SEC staff has emphasized that costs incurred in connection with an exit plan should be charged to the exit accrual only to the extent that those costs were specifically included in the original estimation of the accrual. Costs incurred in connection with an exit plan not specifically contemplated in the original estimate of the liability should be charged to expense in the period in which they are incurred.
ASC 420-10 does not require that reporting entities disclose specific information about the number of employees or the employee groups that are to be terminated. However, reporting entities are not precluded from voluntarily providing such information.

11.4.4.2 Income statement presentation - exit or disposal obligations

Reporting entities are not prohibited from separate income statement presentation of costs associated with exit or disposal activities covered by ASC 420, excluding those activities that involve a discontinued operation. However, ASC 420 requires classification of those costs as part of income from continuing operations before income taxes.
The SEC provides additional guidance in SAB Topic 5.P.3 (codified in ASC 420-10-S99-1) about the appropriate presentation of exit or disposal costs for SEC registrants.

Excerpts from ASC 420-10-S99-1

...[t]he staff believes that restructuring charges should be presented as a component of income from continuing operations, separately disclosed if material. Furthermore, the staff believes that a separately presented restructuring charge should not be preceded by a sub-total representing “income from continuing operations before restructuring charge” (whether or not it is so captioned). Such a presentation would be inconsistent with the intent of FASB ASC Subtopic 225-20.
…The staff believes that the proper classification of a restructuring charge depends on the nature of the charge and the assets and operations to which it relates. Therefore, charges which relate to activities for which the revenues and expenses have historically been included in operating income should generally be classified as an operating expense, separately disclosed if material.

To be consistent with the guidance in ASC 420, we believe the earnings per share effect of exit and disposal costs should not be disclosed on the face of the income statement. Additionally, revenue, related costs, and expenses that will not be continued should not be netted and reported as a separate component of income unless they qualify as discontinued operations. See FSP 27 for discussion of presentation and disclosure requirements associated with discontinued operations.

11.4.5 Warranty

Although product warranties are excluded from the recognition and measurement requirements of ASC 460, Guarantees, they are still subject to certain of its disclosure requirements. Specifically, ASC 460-10-50-8(b) and ASC 460-10-50-8(c) require the reporting entity providing the warranty to disclose its accounting policy and methodology used in determining its liability for product warranties. The reporting entity should provide a tabular reconciliation of the changes in its aggregate warranty liability for each year an income statement is presented in the financial statements.
Extended warranty contracts are subject to the guidance in ASC 606, including related disclosures. Refer to FSP 33.3.
Figure FSP 11-3 includes an example of the reconciliation of product warranty that should be presented for all income statement periods presented.
Figure FSP 11-3
Sample disclosure — reconciliation of product warranty liability
For the year ended December 31, 20X1
Balance at the beginning of the period
$5,000
Accruals for warranties issued
1,225
Accruals related to pre-existing warranties (including changes in estimates)
375*
Settlements made (in cash or in kind)
(2,750)
Impact of foreign exchange rate changes
80*
Balance at the end of the period
$3,930
* Could be an increase or (decrease).

In addition to this tabular reconciliation, reporting entities should consider including narrative disclosure to explain any significant changes or unusual items presented in the table.

11.4.6 Unconditional promises to give

ASC 720, Other Expenses, provides guidance on the recognition and measurement of accounting for contributions, including an unconditional promise to give. Unconditional promises (e.g., pledges to a not-for-profit organization) are any promises that depend only on the passage of time or demand by the promissee for performance. Disclosures for the makers of these promises and indications of the intention to give are included within ASC 450, Contingencies (see FSP 23), and ASC 470, Debt (see FSP 12).

11.4.7 Legal or contractual liability versus contingent liability

A liability represents a present obligation by a reporting entity to transfer or provide an economic benefit to others (e.g., pay cash, convey assets, perform services). Many obligations that qualify as liabilities stem from contracts or other arrangements that are legally enforceable by the government or the courts.
For contractual or legal obligations, there is generally no uncertainty about whether a liability exists once the obligating event has occurred (e.g., receiving a product that the reporting entity ordered even though an invoice has not been received or completing a sale that subjects the reporting entity to a tax on that sale). After the obligating event has occurred, probability of the reporting entity potentially settling the liability for an amount other than the calculated legal or contractual obligation is not relevant in measuring the liability.
On the other hand, a contingent liability involves uncertainty about whether a loss has been incurred. A liability for a contingent loss should be accrued only if the loss is both (1) probable and (2) reasonably estimable. See FSP 23.4.
Question FSP 11-2
Can a reporting entity consider administrative practices and precedents when measuring a liability for an unpaid tax that is not in the scope of ASC 740, Income Taxes?
PwC response
Maybe. The concept of administrative practices and precedents is codified in GAAP only in the context of income taxes within the scope of ASC 740. While there is no explicit authoritative guidance in GAAP that addresses this concept in the context of measuring a liability for an unpaid tax, ASC 105, Generally Accepted Accounting Principles, allows reporting entities to analogize to accounting guidance for similar transactions. A legal obligation under the tax law may be considered similar to an income tax obligation under the tax law. Therefore, in limited situations, and subject to sufficient evidence of the relevant taxing authority’s behavior, it may be acceptable for a reporting entity to consider administrative practices and precedents in measuring a liability for unpaid taxes that are not in the scope of ASC 740. As described in TX 15.3.1.4, administrative practices and precedents represent situations in which a tax position could be considered a technical violation of tax law, but the relevant taxing authority has a widely known, well understood, and consistent practice of nevertheless accepting the taxpayer’s position (with full knowledge of the position being taken and the taxpayers underlying circumstances). By definition, administrative practices and precedents are specific to each jurisdiction and each type of tax position and they depend on observed behavior by the taxing authority, not merely an expectation of (1) the taxing authority’s willingness to negotiate, or (2) past, ad hoc, amnesty programs. However, if a taxing authority has published administrative procedures or otherwise widely known and well understood consistent practices, we believe it would be acceptable for a taxpayer to consider them when assessing measurement of a liability for unpaid non-income-based taxes. Application of this concept outside of ASC 740 should be approached with caution and significant judgment will be required to determine whether it is appropriate to consider administrative practices and precedents to reduce the measurement of what is otherwise a legal liability. Alternatively, it would generally be appropriate to assume application of the relevant statute as written until the liability is settled with the relevant taxing authority.

Once recognized, a legal or contractual liability should be derecognized when the liability derecognition guidance in ASC 405-20-40-1 is met, unless addressed by other guidance.

ASC 405-20-40-1

Unless addressed by other guidance (for example, paragraphs 405-20-40-3 through 40-4 or paragraphs 606-10-55-46 through 55-49), a debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if either of the following conditions is met:
  1. The debtor pays the creditor and is relieved of its obligation for the liability. Paying the creditor includes the following:
    1. Delivery of cash
    2. Delivery of other financial assets
    3. Delivery of goods or services
    4. Reacquisition by the debtor of its outstanding debt securities whether the securities are cancelled or held as so-called treasury bonds.
  2. The debtor is legally released from being the primary obligor under the liability, either judicially or by the creditor. For purposes of applying this Subtopic, a sale and related assumption effectively accomplish a legal release if nonrecourse debt (such as certain mortgage loans) is assumed by a third party in conjunction with the sale of an asset that serves as sole collateral for that debt.

Example FSP 11-3 and Example FSP 11-4 illustrate the accounting for interest and penalties resulting from a failure to remit sales tax.
EXAMPLE FSP 11-3
Interest and penalties — legal liability versus loss contingency
FSP Corp appropriately collected sales tax from its customers in State X. However, FSP Corp failed to timely remit the sales tax collected to State X. The relevant statute in State X includes explicit provisions requiring a company to pay interest and penalties in the event sales tax is not appropriately remitted.
Should FSP Corp record a liability for the interest and penalties in the period in which such amounts were incurred or assess as a loss contingency under ASC 450, Contingencies?
Analysis
In this example, the characteristics of a liability have been met: (a) FSP Corp has a present obligation to pay interest and penalties once it failed to timely remit the sales tax collected from its customers to the appropriate state taxing authority; and (b) FSP Corp has a legal obligation, in accordance with the statute, to pay cash to the taxing authority as a result of the unremitted sales tax.
Therefore, in addition to the base sales tax amounts, FSP Corp should accrue a liability for statutory interest and penalties as a result of its failure to remit sales tax. The liability for the penalties was incurred at the point in time FSP Corp failed to timely remit the sales tax collected; the liability for interest was incurred at the statutorily specified rate over time as the amounts remained unpaid.
EXAMPLE FSP 11-4
Interest and penalties — accounting for future abatements
Assume the same facts as Example FSP 11-3, but in this case for State Y. State Y’s statutes also include provisions for voluntary disclosure filings to abate penalties (and possibly interest). Based solely on discussions with FSP Corp’s legal and tax departments, FSP Corp expects that the accrued interest and penalties liability balance owed will be reduced by 50% within six months.
Should FSP Corp adjust the interest and penalties liability balance today for anticipated settlements or abatements?
Analysis
In cases where a specific violation of tax law has occurred (e.g., failure to timely remit sales tax collections), the amount of interest and penalties due to the state taxing authorities is generally fixed, determinable, and not subject to uncertainty. The abatement provisions in State Y’s statute do not defease the original liability until a waiver is granted by the applicable state taxing authority. Thus, the abatement of such amounts is not solely within the control of FSP Corp.
As such, liabilities initially recorded for interest and penalties should not be adjusted for anticipated settlements or abatements until FSP Corp is legally released of its obligation to remit interest and penalties, which generally occurs at the time the state notifies FSP Corp of the abated amount due.
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