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Employees may be provided termination benefits for a number of reasons. The accounting for the cost of termination benefits is determined based on the nature of the benefits, specifically if there is a voluntary or involuntary termination, and the arrangements through which the benefits are paid. For accounting purposes, termination benefits are commonly classified in one of four groups:
  • Special termination benefits
  • Contractual termination benefits
  • One-time termination benefits
  • Other postemployment benefits
The accounting guidance for special, contractual, and other postemployment benefits is contained in ASC 712, Compensation - Nonretirement Postemployment Benefits, while the guidance for one-time termination benefits is included in ASC 420, Exit or Disposal Cost Obligations, specifically ASC 420-10-25-4 through ASC 420-10-25-10.
In certain circumstances, employee termination benefits may have characteristics of more than one type. For example, employee termination benefits provided in connection with one management action may include benefits due pursuant to both a written or substantive plan as well as additional one-time termination benefits that are not contemplated under the substantive plan. The timing of expense recognition could be significantly affected by which accounting model applies.
The guidance for employee termination benefits in ASC 712 and ASC 420 generally applies to benefits provided to a group of employees, either under an ongoing benefit arrangement or on a one-time basis. Individually negotiated arrangements are generally in the scope of ASC 710-10, Compensation -- General.
A broader termination program may also trigger a curtailment if the reporting entity has a pension or OPEB plan accounted for under ASC 715. For guidance on accounting for curtailments, refer to PEB 4.4.
Figure PEB 8-1 describes the types of termination benefits, the applicable accounting framework and timing of recognition.
Figure PEB 8-1
Applicable accounting framework and timing of recognition
Type of benefit
Applicable guidance
Description of benefits in scope
Timing of liability/expense recognition
Special termination benefits
Benefits offered by the employer for a short period of time in exchange for an employee's voluntary termination.
When an employee irrevocably accepts the offer and the amount can be reasonably estimated.
Contractual termination benefits
Benefits required by the terms of an existing plan or agreement (or through an enhancement to an ongoing benefit arrangement) only upon the occurrence of a specified event (e.g., a plant closing) that causes employees’ services to be terminated involuntarily
When it is probable the employees will be entitled to benefits (i.e., when it is probable that the specified event will occur) and the amount can be reasonably estimated
Other postemployment benefits
Benefits provided in accordance with a mutually understood benefit arrangement between the employer and the employee or former employee
A mutually understood benefit arrangement could be achieved through either a written plan or through a consistent past practice that would constitute a "substantive plan"
When the existing situation or set of circumstances indicates that an obligation has been incurred, it is probable the benefits will be paid, and the amount can be reasonably estimated.
For benefits that vest or accumulate:
  • as the employees provide the services to earn the benefits, or
  • when the liability is probable and reasonably estimable (akin to a loss contingency model)
One-time termination benefits
One-time involuntary termination benefits that are not provided under the terms of an ongoing benefit arrangement or enhancements to an ongoing benefit arrangement that would be applicable for future events
When the conditions specified in ASC 420 have been met, including management’s commitment to a plan and communication to employees
Expense is recognized immediately if future services are not required, or ratably over the period of required future service
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