The FASB has specified certain classification requirements related to costs and reversal of liabilities that are often relevant for exit and disposal costs.
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.
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
- A description of the exit or disposal activity, including the facts and circumstances leading to the expected activity and the expected completion date
- 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:
- 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
- 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.
- The line item(s) in the income statement or the statement of activities in which the costs in (b) are aggregated
- 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
- 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?
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.
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.