ASC 420-10 addresses the accounting for involuntary employee termination costs that are provided pursuant to a one-time benefit arrangement. A one-time benefit arrangement is an arrangement established by a plan of termination that applies for a specified termination event or for a specified future period. For further details on employee termination costs, including one-time benefit arrangements, refer to PEB 8.5.

With the adoption of ASC 842, Leases, the guidance in ASC 420-10 was modified to remove leases from its scope. See the Leases guide and PPE 4.2.4 for further details on the accounting for leases after the adoption of ASC 842.

ASC 420-10 applies to costs to terminate a contract that is not a lease and that existed prior to the entity’s commitment to a plan of disposal. Contract termination costs that may be incurred in connection with an exit or disposal activity are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity.

Costs to terminate a contract before the end of its term should be recognized and measured at their fair value when the entity terminates the contract in accordance with the contract terms. Costs that will continue to be incurred under a noncancelable contract should be recognized and measured at fair value when the entity ceases using the right conveyed by the contract (e.g., the right to receive future goods or services).

Under ASC 842, a lessee may elect an accounting policy, by asset class, to include both the lease and nonlease components as a single component and account for it as a lease. When a lessee has not elected this practical expedient, nonlease components (e.g., common area maintenance, security services) are not accounted for as a lease. Costs to terminate these nonlease components should continue to be accounted for under ASC 420-10, even after the adoption of ASC 842.

Prior to adopting the new leases standard, lease termination costs were accounted for under ASC 420-10. The remainder of this section discusses the accounting prior to adoption of ASC 842.

ASC 420-10 also applies to costs to terminate an operating lease or other contract that existed prior to the entity’s commitment to a plan of disposal. Circumstances in which there is a termination of an operating lease not involving a restructuring activity are also to be accounted for pursuant to ASC 420-10. Contract termination costs that may be incurred in connection with an exit or disposal activity are (a) costs to terminate the contract before the end of its term or (b) costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity (e.g., lease rental payments that will continue after an entity ceases to use the property).

ASC 420-10 provides guidance related to the recognition and measurement of liabilities for lease and contract terminations. Costs to terminate a contract before the end of its term should be recognized and measured at their fair value when the entity terminates the contract in accordance with the contract terms. Costs that will continue to be incurred under a noncancelable contract should be recognized and measured at fair value when the entity ceases using the right conveyed by the contract (e.g., the right to use a leased property or to receive future goods or services). When the contract is an operating lease that is terminated, a liability based on the remaining lease rental should be measured at its fair value when the entity ceases using the rights conveyed by the contract (the "cease-use" date) based on the remaining lease rentals, adjusted for the effects of any prepaid or deferred items recognized under the lease, and reduced by estimated sublease rentals that could be reasonably obtained for the property. Recording a liability at the cease-use date is only appropriate for the cease of use of functionally independent assets (i.e., the assets could be fully utilized by another party) when the lessee is permanently ceasing use. The liability for remaining rentals should be reduced by any estimated sublease rentals, net of direct costs incurred to obtain the sublease (but not reduced to an amount less than zero), regardless of whether the entity intends to enter into a sublease or whether the terms of the lease allow the lessee to sublease the asset. This is due to the fact that the lessor may be required by law to mitigate its damages, as is common in the US. However, ASC 420-10 limits the circumstances in which sublease rentals should reduce the liability by stating that entities must consider estimated sublease rentals only to the extent that they could reasonably be obtained for the property.

With respect to leases, a liability should be recognized at the cease-use date only if the terms of an operating lease are unfavorable relative to the terms of a new lease for similar property. This implies recognition of a liability only if the lease terms are not at prevailing market terms. When estimating the fair value of a liability for costs to terminate an operating lease, an issue arises regarding whether executory costs (that is, property taxes, insurance, maintenance costs) should be included as part of the fair value of the liability. Whether executory costs are considered costs required to be expensed as incurred under ASC 420-10 or costs of the lease termination is not normally relevant, as such costs are inherent in the terms of any lease or sublease and a third party lessee or sublessee would be required to assume them, either directly or indirectly, in connection with any lease or sublease of the property. Consequently, we believe it should be assumed that any obligation to pay executory costs in connection with the termination of an operating lease could be passed through to a subtenant on a sublease. Stated another way, payments for executory costs are generally at prevailing market prices and we would not expect these costs to increase the fair value of an exit liability. Therefore, they are not likely to be accrued at the cease use date. In addition, executory costs not directly related to the leased asset (e.g., personal property taxes or insurance on the lessee’s assets located in the leased location) are not accruable as contract (lease) termination costs under ASC 420-10.

The FASB decided that ASC 420-10 would not be limited to lease termination costs and, as a result, the guidance in ASC 420-10 applies to all contract terminations. Accordingly, when an entity ceases using a property that is leased under an operating lease before the end of its term, the approach in ASC 420-10 contemplates that a liability should be recognized for lease termination costs when the leased property has no substantial future use or benefit to the lessee. Furthermore, ASC 420-10’s "cease-use" date requires that the liability for all lease termination costs be recognized and measured when the rights provided for under the contract are no longer used by an entity in operations. This guidance, however, does not relate to the "impairment" of an operating lease or executory contract. The key point is that ASC 420-10 should not be analogized to losses on executory contracts. The SEC has stated that it is generally inappropriate to recognize impairments on executory contracts unless such losses are specifically prescribed in authoritative literature (e.g., a loss on a sub-lease arrangement not involving a disposal (ASC 840-20-25-15) or a firm commitment to purchase inventory that, when acquired, would be subject to an immediate lower of cost or market write-down (ASC 330-10)).

For further considerations of lease and other contract termination costs, see Question PPE 6-1, Question PPE 6-2, Question PPE 6-3, Question PPE 6-4, Question PPE 6-5, and Question PPE 6-6.

No. As of the communication date, the company has not incurred a liability. Communication of a commitment to cease using two floors of the building in the future does not, in and of itself, create a current obligation of the company. Further, those floors continue to be used in operations for one year from the commitment date. Under ASC 420-10, contract termination costs that continue to be incurred under the contract for its remaining term without economic benefit to the entity can be recognized when the company ceases using the right conveyed by the contract. Accordingly, in year two, the company may be able to recognize the liability for costs associated with the permanently idle floors of the building, once the company ceases using those floors. In addition, the company must prove that the two floors of the building are functionally independent from the rest of the building (e.g., they have a separate entrance to the floor) and will not be used in operations (e.g., they are not being used as storage). The measurement is based on the fair value of the remaining lease rentals, reduced by estimated sublease rentals that could be reasonably obtained for the property.

A liability should be recognized under ASC 420-10 for the costs associated with one or more floors or portions of floors, provided they are functionally independent assets (i.e., they could be fully utilized by another party because, for example, they have separate entrances, access to restrooms, etc.) and the lessee intends to cease using them permanently. Usage would not be considered to cease permanently if the lessee intends to resume using the assets prior to the end of the lease term, the assets cannot be leased in its present condition, or the lessee has not determined whether it will resume using the assets at a loss. If usage is not considered to cease permanently and the lessee subleases the assets, ASC 840-20-25 would apply at the time the asset is subleased.

Notwithstanding the FASB's use of the term "operating lease or other contract," we believe that it did not intend to change the accounting based on whether a lessee leased a group of functionally independent assets in a single lease transaction or in a number of related lease transactions, all entered into at the same time. Accordingly, we believe the accounting should be the same for both situations. ASC 420-10 should be applied to the functionally independent assets on an asset-by-asset basis.

Yes. We believe that, even if the terms of the lease preclude the lessee from subleasing the building, potential sub-lease rentals should be considered in measuring the liability if the building could be re-leased by the lessor to another lessee during the remaining term of the lease and the lessor is legally required to mitigate the amount of damages in the event of lessee default, as is typical in the United States.

In determining the amount of sublease rentals that could be obtained for the building, we believe Company A should consider all of the relevant facts and circumstances. These would include, among others: (1) the length of the remaining term of the lease, (2) the cost to obtain one or more lessees or sublessees, including brokerage commissions and leasehold improvements that would be required, and (3) any other market or other external impediments to re-leasing or subleasing the property. Company A should not consider any internal or self-imposed impediments to subleasing, such as (1) precluding a competitor from being a sublessee candidate, or (2) deciding to forego the pursuit of sublease rentals in order to focus its efforts on its primary business. Company A should consider the current fair market rental for equivalent property and assess the ability to obtain sublease rentals for the specific property under lease within the context of the overall local real estate market. A liability should be recognized at the cease-use date only if the terms of an operating lease are unfavorable relative to the terms of a new lease for similar property.

An expected present value technique will often be the best measure to estimate the liability.

Company A should review its amortization estimates on January 1, 20X1, pursuant to ASC 250, and accelerate amortization over the revised remaining useful life of six months, through June 30, 20X1. Company A's plan to exit the building earlier than anticipated and enter into the sublease at a loss provides evidence that the useful life of the leasehold improvements is shorter than the remaining original life of four years.

ASC 420-10-40-1 makes it clear that a liability should be reversed if an event or circumstance occurs that discharges or removes an entity’s responsibility to settle a liability for a cost associated with an exit or disposal activity recognized in a prior period. ASC 420-10, however, is not clear as to what criteria should be used to evaluate when the accrual should be reversed. We believe that the guidance provided in ASC 420-10 in determining when to recognize costs associated with exit or disposal activities should also be considered to determine when, if applicable, such a charge should be reversed.

The reversal of the exit activity is initiated when either (1) management, having the authority to approve the action, commits to a plan that utilizes the space or (2) management otherwise begins to use the space. Therefore, in this set of facts and circumstances, the liability would be reversed in September 20X3 once the Board approved the action to re-enter the space and could no longer assert the accrual for an exit activity was necessary.

Company A should first evaluate whether its sublease constitutes a permanent or temporary exit of the vacated floor. Consideration should be given to management's plans and intent for the two years remaining on the lease term after the end of the sublease. If management considers the exit to be temporary because management intends to reoccupy the space at some future date or has not made a decision to permanently exit the space, the threshold for applying ASC 420-10 for a contract termination is not met. Accordingly, ASC 840-20-25-15 would be applicable. Under ASC 840-20-25-15, at June 30, 20X1 (the date of the execution of the sublease), a loss on sublease would be recorded.

If management commits to exiting the space permanently, Company A should make an accounting policy election to either (a) record a liability upon execution of a sublease in accordance with ASC 840-20-25-15 or (b) record a liability upon its cease-use date in accordance with ASC 420-10. If Company A's policy is to account for the loss on a sublease in accordance with ASC 840-20-25-15, a liability should be recorded on June 30, 20X1 (the execution date of the sublease). The liability should be measured based on the three-year sublease period. On July 31, 20X1, when Company A ceases using the floor, ASC 420-10 applies and the liability would be adjusted to its fair value in accordance with ASC 420-10. The liability would be based on the remaining lease rentals, over the remaining five-year term of the head lease, reduced by actual or estimated sublease rentals at the cease-use date.

If, on the other hand, Company A's policy when permanently exiting a space is to follow ASC 420-10, a loss should not be recorded upon execution of a sublease. Company A would record a liability under ASC 420-10 for the termination of the contract on July 31, 20X1, the cease-use date. Under either accounting policy election, the liability balance under ASC 420-10 would be the same at July 31, 20X1.

The cease-use date is the date Company A physically vacates the space. Only when Company A executes a sublease on the same date it ceases using the space would the execution and cease-use dates coincide.

ASC 420-10 also applies to other costs associated with an exit or disposal activity, including costs incurred for (1) protecting and maintaining an asset while held for sale, (2) plant closings, and (3) employee or facility relocations. Typically, these costs are not associated with, and will not be incurred to generate revenues following an entity's commitment to a plan, and are incremental to other costs incurred by the entity (i.e., the costs will be incurred as a direct result of that plan).

With respect to other exit costs, irrespective of the direct nature of these costs, ASC 420-10 requires that a liability for such costs only be recognized when they meet the definition of a liability in CON 6, rather than upon commitment to an exit or disposal plan. The primary basis for recognition lies in the present obligation to others based on a requisite past transaction or event. Accordingly, a company’s intention, which is reflected in the commitment to a plan, does not in and of itself create a present obligation to others.

ASC 420-10 requires that other costs related to exit or disposal activities be accounted for at fair value (see PPE 6.4.1.2). In addition, ASC 420-10 provides guidance for the subsequent accounting for those costs (see PPE 6.4.1.3).

Although ASC 420-10 does not allow for costs associated with exit or disposal activities to be recognized until incurred, we believe that the criteria included in SAB 100 provide guidance in determining which costs are considered exit-related cost and can be presented and disclosed in the financial statements as restructuring costs. (Note that the term "commitment" (used in the SAB) has been replaced with the term "communication" in the list below, to comply with ASC 420-10.)

For further considerations of the accounting for other exit costs, see Question PPE 6-7, Question PPE 6-8, and Question PPE 6-9.

No. Only those costs for which the liability is incurred can be classified as exit costs and should be accrued at fair value at the communication date. For example, costs such as those associated with the relocation of people or equipment, with the disposal of equipment that has no value, or with closing a facility that is removed from operations, should not be accrued at the communication date. Costs associated with terminating a lease should be recognized and measured at its fair value at the cease-use date, or when the entity terminates the contract in accordance with the contract terms (e.g., when the entity explicitly gives written notice to the counterparty within the notification period specified by the contract, or has otherwise negotiated a termination with the counterparty).

No. While recognition of estimated exit costs and involuntary termination benefits for the 60 identified stores is appropriate, the requirements of ASC 420-10 have not been met for the remaining 10 stores.

If the company decides not to close one of the 60 stores in a period following it recognizing the liability, the related accrued exit costs and involuntary employee termination benefits for the one store must be reversed; the liability cannot be maintained in anticipation of the costs expected to be incurred when other stores are identified for closing.

The vendor's reimbursement for plant closing and severance cost falls under the scope of ASC 705-20. Cash consideration received by a customer from a vendor is presumed to be a reduction of the prices of the vendor's products or services and should, therefore, be characterized as a reduction of cost of sales when recognized in the customer's income statement, unless the criteria in ASC 705-20 are met. The presumption could not be overcome in this circumstance as the vendor does not receive a distinct benefit (goods or services) in exchange for the consideration. Although there is agreement to reimburse the company for the costs, the reimbursement is for cost associated with the closure of the plant as long as the company enters into a supply contract arrangement with the vendor, not specifically for the sale of the vendor’s products, as contemplated in ASC 705-20-25-1. The last criteria in ASC 705-20 is also not met, as the reimbursement is not for sales incentives offered to customers by manufacturers.

The company should separately assess the accounting for costs associated with the plant closure under applicable literature (e.g., ASC 420, ASC 712, ASC 715, ASC 450) and the vendor's reimbursement under ASC 705-20, and not as an offset to each other. The vendor's reimbursement should be treated as a reduction of cost of sales over the life of the supply contract entered into between the company and the vendor in this arrangement, as the nature of the incentive is for the company to continue in a supply agreement.

Similar to costs that are associated with exit or disposal activities, other costs that are not part of these activities are only recognized as liabilities when incurred. Such costs that are not associated with the one-time termination benefits include, among others, repairs and maintenance, software development, moving, relocation, training (which is not part of a termination benefit), and hiring costs. Examples of costs that do not qualify as exit costs include:

These costs generally do not qualify as exit costs because they are generally incurred in order to benefit future periods. Accordingly, these costs should generally not be included in the presentation and disclosure of costs accounted for under ASC 420-10. As described in ASC 420-10-25-14 and ASC 420-10-25-15 and based on conversations with the SEC staff, employee relocation costs that are incremental and a direct result of an exit plan may be included in the presentation and disclosure of exit and other associated costs under ASC 420-10 if the inclusion of such costs is adequately disclosed (such costs must still be expensed as incurred pursuant to ASC 420-10-25-14 and ASC 420-10-25-15).

For further considerations regarding costs that do not qualify as exit costs, see Question PPE 6-10, Question PPE 6-11, Question PPE 6-12, Question PPE 6-13, and Question PPE 6-14.

No. Such costs are related to ongoing or future operations and, therefore, would not qualify as exit costs.

No. Such costs are associated with the ongoing operations of the company and as such would not be accrued as part of the restructuring charge.

No. Repairs and maintenance costs are not "contract termination costs" as defined by ASC 420-10-25-11. Rather, repairs and maintenance are considered "other associated costs" pursuant to ASC 420-10-25-14. Accordingly, a liability for such costs should be recognized and measured at its fair value in the period in which the liability is incurred, which is generally when the associated activities are performed, even if the costs are incremental to other operating costs and will be incurred as a direct result of a plan to exit. It should also be noted that repairs and maintenance costs are not included in the scope of ASC 420-10-15-3.

No. The costs to dismantle, transport, and reassemble the manufacturing equipment should be expensed as incurred. The costs are for moving the equipment; they do not extend the useful life of the equipment or improve the quantity or quality of goods produced by the equipment. Additionally, a proposed SOP, Accounting For Certain Costs and Activities Related to Property, Plant and Equipment, which was approved by FinRec in 2003 but not approved by FASB, addressed the accounting for dismantling, transportation, and reassembly costs. The view expressed in the SOP, while not authoritative, was that the costs described above should be expensed when incurred.

If some of the costs incurred increased the assets' useful life or increased the quantity or quality of units produced, a portion of those costs might be capitalizable and depreciated over the assets' remaining useful life.

The noncancelable payments for the cardboard under the supply agreement do not constitute exit costs under ASC 420 and, therefore, should be excluded from the restructuring charge. Although Company A will continue to incur the costs of purchasing cardboard without taking delivery (i.e., no future benefit), the company will still receive the discounts on the purchase of paper and ink. The discount constitutes an economic benefit of the contract. As continued economic benefit is derived from the agreement, the costs related to the purchase of the monthly cardboard volumes should be reflected as a component of the costs of purchasing paper and ink on an ongoing basis and reflected in operating profit; if Company A includes a "restructuring" line item in its income statement, it should not include the costs related to the cardboard.

Since the payments to the vendor for the cardboard are made to obtain a discounted price on the paper and ink, a portion of those payments may be allocable to the inventory cost of paper and ink. The guidance in ASC 330 should be considered in determining what would be included as an inventoriable cost.