prescribes the accounting for the estimated cost of other postemployment benefits provided by an employer to former or inactive employees after employment but before retirement. These benefits include salary continuation, supplemental unemployment benefits, severance benefits, disability related benefits (including workers’ compensation), job training and counseling, and continuation of benefits, such as health care benefits and life insurance coverage. These benefits are generally viewed as part of the compensation provided to employees in exchange for service.
Of these benefits, those that vest or accumulate are accounted for using the same model applied when accounting for compensated absences pursuant to ASC 710-10-25-1
through ASC 710-10-25-3
(see PEB 6.4
). Other benefits that do not meet these conditions are accounted for using a loss contingency model under ASC 450-20-25-2
Under a loss contingency model, a liability to pay benefits that is reported in the balance sheet should result from a condition, situation, or set of circumstances that existed at the balance sheet date. A liability should be recorded when it is probable that a liability had been incurred at that date and the amount is reasonably estimable. For example, the existence of a postemployment benefit plan evidences an employer’s promise to provide termination benefits to involuntarily terminated employees. Employers with such a plan have generally communicated it to employees so that they understand the benefits they would be entitled to receive if they are involuntarily terminated. Thus, the employer with such a plan has a mutual understanding with its employees regarding the benefit arrangement and has therefore obligated itself to pay the benefits in the event of their involuntary termination. Accordingly, the existing condition, situation, or set of circumstances requirement is met, and a liability for the cost of the benefits would be recognized when it is probable that the employer will involuntarily terminate the employment of employees, and the amount of the termination benefits is reasonably estimable. The accrued amount should incorporate an estimate of employees that will voluntarily cease employment prior to being involuntarily terminated and not ultimately receive the severance benefits.
An employer's nonretirement postemployment benefit obligation is the sum of:
- the reasonably estimable value of nonvested/nonaccumulating postemployment benefits that are probable of payment to the current group of former or inactive employees (e.g., those on disability leave); and
- a proportionate amount (based on the portion of the required service period rendered) of the probable and reasonably estimable value of vesting or accumulating postemployment benefits expected to be paid to current employees.
Uncertainty regarding the timing of benefit payments does not preclude the recognition of the obligation.
Question PEB 8-3 discusses voluntary termination benefits that have elements of contractual and one-time termination benefits.
Question PEB 8-3
A subsidiary is in the process of streamlining its organization in anticipation of being spun-off by its parent. This spin-off will lead to the termination of 100 subsidiary employees. The subsidiary is offering its employees the opportunity to receive one-time incremental termination benefits, in addition to the termination benefits available under the parent’s pre-existing severance plan, if they are willing to leave the company. The employees were notified of this opportunity on March 1 and have until March 31 to notify the subsidiary if they will voluntarily leave. The subsidiary will then determine which voluntary terminations to accept. If less than 100 employees voluntarily agree to terminate then the subsidiary will involuntarily terminate sufficient employees to ensure that they eliminate at least 100 employees in total. All decisions will be made on or before April 30 and communicated to the employees on April 30.
Should the voluntary termination benefits be accounted for as a special termination benefit, a contractual termination benefit, and/or as a one-time termination benefit?
The voluntary termination benefits being offered to the employees should be accounted for in two pieces. The portion that is provided under the parent’s pre-existing severance plan is a postemployment benefit (ASC 712
) and the incremental portion is a one-time termination benefit (ASC 420
; see PEB 8.5
). The benefits should not be accounted for as special termination benefits. Under ASC 712-10-25-1
, "special termination benefits to employees shall be recognized as a liability and a loss when the employees accept the offer and the amount can be reasonably estimated." However, this guidance applies when a plan would be binding once the employee accepts the offer. Due to the fact that the subsidiary can either accept or deny the employee's acceptance of this termination program, this plan is not considered a special termination benefit as the subsidiary has to make the final decision to terminate an employee.
For termination benefits provided under the parent’s pre-existing severance plan, a liability should be recognized when it is probable and reasonably estimable (ASC 712-10-25-2
). The subsidiary should consider when the decision was made to streamline the operations and eliminate 100 employees as that is the date when it would be probable and reasonably estimable that 100 employees will be entitled to the contractual termination benefits.
For the one-time benefits that are incremental to the parent’s pre-existing severance plan, a liability should be recognized when the criteria under ASC 420-10-25-4
are met. Consequently, for the portion subject to ASC 420
, the subsidiary would record the liability when they determine which employees’ offers of termination they will accept (i.e., sometime in April), as that is the point at which management would have committed to the plan of termination (assuming that the other three criteria of ASC 420-10-25-4
have been met) and communicated the benefit arrangement.
Question PEB 8-4 discusses termination benefits provided both under a written plan and a one-time supplemental arrangement (see PEB 8.5
Question PED 8-4
On December 15, 20X8, a company makes a general announcement that cost-cutting measures are underway and an involuntary work force reduction will occur in the near future. As of December 15, 20X8, the company has identified affected employees, but has not notified them and does not plan to do so until January 20X9. Upon termination, no future services will be required of the employees.
The company has a written plan that specifies that an involuntarily terminated employee receives two weeks of base salary for every year of continuous employment. In connection with this work force reduction, management has decided to provide severed employees with an extra week of base salary for every year of continuous employment. This additional benefit will be communicated in January 20X9 when identified employees are notified. Management does not intend to offer this additional week in future severance events.
What model for termination benefits should be used? When should the liability and related expense be recorded?
The company would account for the benefits associated with the three weeks of base salary for each year of service in two pieces. Two of the three weeks would be accounted for under the other postemployment benefit plan (under ASC 712
) because the company has a written plan that entitles severed employees to two weeks of base salary for every year of continuous employment. The related liability and expense for those termination benefits would be recorded on December 15, 20X8 for the identified employees, as there is a mutual understanding of benefits that employees will be entitled to receive at that time, and the benefits are both probable and estimable at that time.
The company would account for the benefits associated with the additional one week of base salary for each year of service as one-time employee termination benefits (under ASC 420
) because that benefit is an additional one-time benefit and is not covered by an existing written or substantive plan. The related liability and expense for those termination benefits would be recorded in January 20X9 upon communication of these benefits to the impacted employees ("communication date"), when the benefit arrangement is mutually understood by the employees. The amount of the benefit would be recognized immediately, as no future services are required to receive the additional benefit. See PEB 8.5
for further discussion.