addresses the accounting for special and contractual termination benefits that are payable before retirement and are not payable from a pension or other postretirement benefit plan. Refer to PEB 4
for further discussion of termination benefits paid out of a pension or other postretirement benefit plan. Note, however, that the accounting treatment of special and contractual termination benefits, including timing of recognition, is similar whether or not paid from a pension or other postretirement plan.
Special termination benefits arise when the employer offers, for a short period of time, certain additional benefits to employees electing voluntary termination. 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. That timing would generally coincide with when the employees irrevocably accept the offer as it would be unlikely that the termination liability would not be reasonably estimable at that time. It would not be appropriate to record an accrual at the time of the offer based on an estimated acceptance rate.
There may be situations when an offer of special termination benefits extends beyond the end of a reporting period. Irrevocable acceptances received prior to the period end give rise to recognition of a termination liability at the balance sheet date. A contingent liability for offers still outstanding and offers that have not yet been irrevocably accepted should not be accrued even if the acceptances are received prior to issuance of the financial statements. Such amounts should be disclosed, if significant, pursuant to ASC 450-20
, Loss Contingencies,
(i.e., they would be a non-recognized subsequent event).
Question PEB 8-1 discusses the determination of scope for voluntary termination benefits and the timing of recording a liability for such benefits.
Question PEB 8-1
A company announces a plan to reduce costs through the phase-out of a particular product line. The employees impacted by this decision were provided an offer to voluntarily terminate their employment with the company. In return, the employees will receive a one-time termination benefit. The employees were notified of this opportunity on December 15, 20X8 and have until January 15, 20X9 to notify the company if they will accept its offer. Management has indicated that it will process all offers that are accepted by employees. Upon termination, no future services will be required of the employees.
What model for termination benefits should be used? When should the liability and related expense be recorded?
Based on the fact pattern, the company would account for the termination benefits as a special termination benefit (under ASC 712
) based on the fact that the one-time termination benefit is in exchange for an employee's voluntary termination. The liability and related expense for the special termination benefit would be recorded upon irrevocable acceptance of the offer by an employee. Since the company will accept all employee offers to terminate and no future services are required, the liability and expense will be recognized upon employee acceptance.
Only irrevocable acceptances received by December 31, 20X8 would be recorded in the financial statements as of that date. Accordingly, some of the expense for the termination benefits may be recorded in 20X8 and some in 20X9, based on the acceptances in each period.
Question PEB 8-2 discusses special termination benefits for employees that must work for an extended period of time after acceptance of a voluntary termination offer.
Question PEB 8-2
On December 1, 20X8, a company offers voluntary termination benefits to employees who meet specified criteria and agree to terminate employment at the end of the following year. To receive the benefit, eligible employees must (a) accept the offer to voluntarily terminate their employment by signing agreements before December 31, 20X8 and (b) be employed at the date of termination (December 31, 20X9).
How should the company account for this voluntary termination benefit?
The voluntary termination benefits should be accounted for as a special termination benefit. In order for the employer to have a liability to pay special termination benefits, employees must accept the offer. However, ASC 712
does not address the situation in which the benefits do not vest upon employee acceptance but involve future service requirements. In general, for a newly established arrangement (voluntary or involuntary) that requires future service beyond a nominal period (generally no more than 60 days, by analogy to ASC 420-10-25-7
), we believe the cost should be recognized over the period during which that service is rendered. Thus, the cost of the benefits should be accrued ratably over the affected employees' remaining service period (i.e., the period between the acceptance/agreement through the scheduled termination date).
This is consistent with the "stay bonus" concept discussed in ASC 420
for involuntary termination benefits. Under that concept, the cost of incremental compensation that is not part of a pre-existing benefit arrangement is typically recognized over the required future service (vesting) period, as the termination benefits are being provided not solely for the agreement to terminate employment, but also for substantive future services. It is also consistent with other existing accounting models explicitly addressing benefits with future vesting requirements, such as deferred compensation arrangements (ASC 710
) and stock-based compensation arrangements (ASC 718