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.

Note that the guidance uses the phrase “contractual” in this context to refer to benefits triggered by specifically identified events (such as a plant closure), not just that the benefits are established pursuant to an existing contractual arrangement. Benefits that are payable pursuant to an existing severance plan that do not depend on the occurrence of a specific event are addressed in PEB 8.4.

The FASB recognized the inconsistency between the timing of recognition for special termination benefits (see PEB 8.2) and contractual termination benefits, but concluded the different nature of the two events warrants different treatment. In the case of special termination benefits, it is the employees, not the company, 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, and the benefits should be accrued when the decision causing the event is made and that decision makes it probable that termination benefits will be paid.