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ASC 715 covers the accounting for two types of termination benefits, special termination benefits and contractual termination benefits provided under an ongoing defined benefit pension arrangement. The cost of the termination benefits is determined by the amount of the lump-sum payments or the present value of expected future payments (or increases to future benefit payments as a result of the termination). The portion of a non-vested benefit that becomes vested as part of the termination is included in the cost of the termination benefit. For example, if a non-vested employee becomes 100% vested as a result of the termination, the entire present value of the employee's vested benefit is included in the cost of the termination benefit.

4.7.1 Special termination benefits

Special termination benefits arise when the employer offers to provide, for a short period of time, certain additional benefits to employees electing voluntary termination, including early retirement. A liability should be recorded and an expense recognized in the period the employees irrevocably accept the offer and the amount of the termination liability is reasonably estimable. Once the employees irrevocably accept the offer, it would likely be difficult for an employer to assert that the termination liability is not reasonably estimable. PEB 8.2 covers specific situations involving special termination benefits that require a minimum service period after an employee accepts the offer, or when acceptance by the reporting entity of the employee’s decision is required.
There may be situations when a special termination benefits offer extends beyond the end of a reporting period. Irrevocable acceptances by the period-end date should be recorded as a termination liability; however, revocable acceptances at that date or irrevocable acceptances that occur after the balance sheet date but before the financial statements are issued (or available for issuance) would not be accrued and recorded at the balance sheet date (i.e., a non-recognized subsequent event under ASC 855). The contingent liability for offers still outstanding and offers that have not yet been irrevocably accepted should be disclosed, if significant, pursuant to ASC 450-20, Loss Contingencies.
There also may be situations when, in connection with a downsizing action, employees may elect either a cash severance package or a special termination pension benefit. For example, eligible employees may be given a choice between special termination pension benefits with a present value of $15,000 or a cash payment of $12,000. As it is clear that the reporting entity's minimum liability is $12,000 per terminated employee, a loss should be recorded on that basis as part of the restructuring in accordance with ASC 420, Exit or Disposal Cost Obligations. The additional amount ($3,000) should be accrued at the date of acceptance by employees who irrevocably elect the higher benefit. See PEB 8.5.)

4.7.2 Contractual termination benefits

Contractual termination benefits are provided to employees when employment is terminated due to an event specified in the provisions of an existing plan or agreement (e.g., a labor contract). For example, an agreement may provide that, in the case of a plant closing, the employer will provide stated benefits to affected employees. A liability should be recorded for contractual termination benefits and the expense recognized when it is probable that employees will be entitled to the benefits and the amount is reasonably estimable pursuant to ASC 715-30-25-10. See BCG 2.5.10 for a discussion related to business combinations.

4.7.3 Applicable guidance and timing of recognition

The timing of recognition differs for special termination benefits and contractual termination benefits. Timing of recognition of special termination benefits is based on employee acceptance; timing of recognition of contractual termination benefits depends on the employer’s assessment of probability. The FASB’s guidance is explicit and intentional in this regard and is based on a view that the nature of the two types of benefits are different, thus justifying different accounting treatment. In the case of special termination benefits, it is the employees, not the reporting entity, who elect termination, and no obligation arises until the employees make that irrevocable election. However, an employer is legally bound to pay contractual termination benefits whenever the specified event occurs, which is generally within the control of the employer, and the cost of those benefits should be accrued when the decision causing the event is made if the decision makes it probable that benefits will be paid.
ASC 420, Exit or Disposal Cost Obligations, addresses the accounting for costs associated with exit or disposal activities. Although it prescribes the accounting for one-time termination benefits, which it defines as benefits that are established by a plan of termination that applies for a specified termination event or for a specified future period, it does not amend the accounting for termination benefits paid through a preexisting plan, including contractual termination benefits currently accounted for under ASC 715. Refer to FSP 13 and PEB 8 for a more detailed discussion of ASC 420.
Events that give rise to termination benefits may also result in a curtailment if sufficient terminations take place to meet the employer's significance threshold for reductions of future years of service. ASC 715-30-55-222 through ASC 715-30-55-230 provides examples of accounting for a plan curtailment involving special termination benefits. Termination benefits may also give rise to a settlement in plans that allow the pension benefit to be paid as a lump sum at retirement.
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