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ASC 420-10, Exit or Disposal Cost Obligations, addresses significant issues related to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. ASC 420-10 focuses on the recognition of liabilities, specifically requiring that companies only record liabilities when they are incurred. 
ASC 360-10, not ASC 420-10, governs the accounting for the impairment of long-lived assets and assets to be disposed of. See PPE 5 for further discussion on identifying, measuring, recording, and classifying impairment charges.
Prior to adopting ASC 842, Leases, lease termination costs were accounted for under ASC 420-10. With the adoption of ASC 842, the guidance in ASC 420-10 has been modified to remove leases from its scope. Refer to LG 4.4 for further details regarding the subsequent recognition and measurement of a lease and LG 5 for further details regarding modification and remeasurement of a lease. See PPE 4.2.4 for details regarding the subsequent accounting for right-of-use assets, PPE 5.2.6 for lease impairment considerations, and PPE 6.4.1.1 for a discussion of lease abandonments. See FSP 11.4.4.1 for a discussion of the presentation and disclosures of exit and disposal cost obligations.
When deliberating ASC 420-10, the FASB discussed whether a definition of restructuring should be developed, but believed an operational definition of restructuring for accounting purposes was not feasible. ASC 420-10 does, however, indicate that an exit activity includes, but is not limited to, a restructuring as defined in International Accounting Standard No. 37 (IAS 37), Provisions, Contingent Liabilities and Contingent Assets. As a result, costs associated with exit or disposal activities under ASC 420-10 include, but are not limited to: (1) involuntary employee termination benefits pursuant to one-time termination plans (i.e., other than pre- existing arrangements or a new plan that is expected to be ongoing, the accounting for which is addressed in ASC 710), (2) costs to terminate a contract that is not a lease, and (3) other exit costs.
IAS 37 defines restructuring as "a programme that is planned and controlled by management, and materially changes either: (a) the scope of a business undertaken by an entity; or (b) the manner in which that business is conducted." A restructuring covered by IAS 37 includes the sale or termination of a line of business, the closure of business activities in a particular location, the relocation of business activities from one location to another, changes in management structure, and a fundamental reorganization that affects the nature and focus of operations.

6.5.1 Costs associated with exit or disposal activities

ASC 420-10 incorporates many of the views of the SEC staff that were previously included in SAB 100. The issuance of SAB 103 in May 2003 resulted in the deletion of SAB 100 guidance previously included under SAB Topic 5.P.1 and SAB Topic 5.P.2. However, there continue to be specific areas and issues included in the previous guidance that provide additional insights beyond that in ASC 420-10 and have been included in the discussion that follows.
Certain costs that may be associated with exit or disposal activities are not included in the scope of ASC 420-10. Examples of these costs include:
  • Termination benefits that are provided to employees under the terms of an ongoing benefit arrangement (or enhancements to an ongoing benefit arrangement) or an individual deferred compensation contract covered by other accounting pronouncements. If termination benefits are offered in exchange for an employee’s voluntary termination of service, the liability for such voluntary termination benefits should be recognized in accordance with ASC 712-10.
  • Costs to terminate a lease are to be accounted for in accordance with ASC 842-20 (after adoption of ASC 842). Costs to terminate a capital lease are to be accounted for in accordance with ASC 840-10 (prior to adoption of ASC 842).
  • Costs associated with the retirement of a long-lived asset are to be accounted for in accordance with ASC 410-20.
  • Impairment of long-lived assets and long-lived asset disposal groups are to be accounted for in accordance with ASC 360-10.
See BCG 2.5.15 for guidance with respect to the recognition of liabilities related to restructurings or exit costs in a business combination.

6.5.1.1 Initial recognition of liabilities for exit/disposal activities

ASC 420-10 incorporates the liability recognition concepts embodied in CON 6. Accordingly, a liability associated with an exit or disposal activity should be recognized only when an event has occurred that creates a present obligation to transfer assets or provide services in the future that meets the definition of a liability set forth in CON 6. ASC 420-10 emphasizes that the present obligation must be to others and result from the occurrence of a past event. In this regard, ASC 420-10 makes it clear that an entity's commitment to an exit plan, in and of itself, does not create a present obligation to others for the costs expected to be incurred under the plan. Under ASC 420-10, a liability for costs associated with an exit or disposal activity is incurred when the three characteristics of a liability cited in CON 6, par. 36 are present. Specifically, an entity must:
  • Have a “present duty or responsibility to one or more entities that entails settlement by probable future transfer, or the use of assets at a specified or determinable date, on occurrence of a specified event, or on demand”. ("Probable" is used with its general meaning and not in the specific technical sense that it is used in ASC 450-10, Contingencies, Overall. Thus, it does not imply the same "high degree of expectation" that its use in ASC 450-10 implies.)
  • Have little or no discretion in avoiding a future transfer of assets or providing services
  • Determine that an obligating event has already happened
The requirement to recognize costs associated with exit or disposal activities at fair value differs from the probability notion in ASC 450-10. Using that criteria, a liability for costs associated with disposal activities would have been initially recognized when (1) the future transfer of assets or provision of services was probable (as that term is used in ASC 450-10), and (2) the amount could be reasonably estimated. However, as noted above, recognition of exit costs under ASC 420-10 is not based on the probable and reasonably estimable model. ASC 450-10 deals with uncertainty by using a probability threshold for recognition of a loss contingency. In the estimation of the fair value of a liability for exit costs under ASC 420-10, uncertainty in the amount and timing of the future cash flows necessary to settle a liability is addressed by incorporating that uncertainty in the measurement of the fair value of the liability following the principles of CON 7.

6.5.1.2 Fair value of liabilities for exit/disposal activities

ASC 420-10 requires that a liability for a cost that is associated with an exit or disposal activity be recognized at its fair value when incurred. That is, it should be recognized when the cost meets the definition of a liability (as set out in CON 6, par. 35). See the Fair value measurements guide for additional guidance on measuring the fair value of the liability.

6.5.1.3 Subsequent accounting for exit/disposal activity accruals

ASC 420-10 provides guidance regarding the subsequent accounting for liabilities associated with exit or disposal activities. Companies are required to subsequently adjust accruals established under ASC 420-10 for changes resulting from revisions to either the timing or the amount of estimated cash flows. That change should be measured using the credit-adjusted risk-free rate that was used to initially measure the liability. Accordingly, subsequent measurement of the liability is not at fair value. The adjustment should be recognized in the period of change and reported in the same line item as the original costs were classified at initial recognition.
ASC 420-10 also requires the liability to be adjusted due to the passage of time as an increase in the liability and as an expense (e.g., accretion expense). Interest on the liability would be accreted using the original effective rate, and recognized as an operating expense in the income statement (or statement of activities). This guidance is similar to that in ASC 410-20, Asset Retirement and Environmental Obligations, Asset Retirement Obligations.

6.5.2 Employee termination costs

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.

6.5.3 Contract termination costs (under ASC 842)

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.

6.5.3A Lease and other contract termination costs (prior to 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.
Question PPE 6-1 (prior to ASC 842)

An exit plan includes a reduction in the operations currently performed in a leased facility comprised of five floors. The lease is an operating lease, expiring three years from the date management commits to an exit plan and communicates the plan. At that date, all five floors are fully used in operations and will continue to be used for one year. When the exit plan is completed in one year, only three floors of the leased space will be used. The remaining two floors will be permanently idle. Assuming all other provisions of ASC 420-10 have been met, may the company recognize a liability at the communication date for the exit costs associated with the two floors of the building that will be permanently idle?
PwC response
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.
Question PPE 6-2 (prior to ASC 842)

A lessee of commercial office space leases several floors of a multi-tenant office building. The lessee has ceased using certain floors and portions of other floors in the building. Should a liability for contract termination costs be recognized under ASC 420-10?
PwC response
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.
Question PPE 6-3 (prior to ASC 842)

If Company A ceases use of a leased building, should it calculate the fair value of the liability under ASC 420-10 by reducing the remaining lease rentals by the current fair market rental for equivalent space, assuming that the leased building could be subleased at the current fair market rental, regardless of whether the terms of the lease allow the lessee to sublease the asset?
PwC response
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.
Question PPE 6-4 (prior to ASC 842)

On January 1, 20X6, Company A commits to a plan to exit a facility on June 30, 20X6. The facility is subject to an operating lease that Company A will continue to use until June 30, and will then sub-lease to an unrelated third party. The lease facility is part of a larger asset group, for which there is no impairment. Company A will meet the criteria within ASC 420 for recognizing a liability associated with the lease only when Company A reaches the cease-use date of June 30, 20X6. Payments received by Company A under the sublease will be less than the amount paid by Company A under the original lease and are believed to represent estimated sublease rentals that could be reasonably obtained for the property. Company A has $100 of leasehold improvements (net of accumulated amortization) associated with the leased building at January 1, 20X6, with four years of original useful life remaining. The fair value of the leasehold improvements is expected to be de minimus at the date of exit.

How should Company A account for their leasehold improvements?
PwC response
Company A should review its amortization estimates on January 1, 20X6, pursuant to ASC 250, and accelerate amortization over the revised remaining useful life of six months, through June 30, 20X6. 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.
Question PPE 6-5 (prior to ASC 842)

In 20X3, a company reached a decision to exit a leased facility. The company met the "cease-use" criteria in accordance with ASC 420-10, and properly recorded a liability based on the remaining lease rentals reduced by the estimated sub-lease rentals that could be reasonably obtained for the property. After the restructuring, the company executed a sub-lease for this space. In July 20X5, the company and the sub-lessee failed to renew the sub-lease agreement and the sublessee vacated the facility. At the same time, the company had positive news related to their business that would require additional physical capacity. In September 20X5, as part of their annual long-term strategic plan, company management and the Board decided they would no longer seek to sub-let the remaining space and instead use the remaining space for their own business needs. What criteria should the company use to evaluate when to reverse a restructuring accrual?
PwC response
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 20X5 once the Board approved the action to re-enter the space and could no longer assert the accrual for an exit activity was necessary.
Question PPE 6-6 (prior to ASC 842)

Company A leases three floors of office space over a ten year non-cancelable operating lease term. In year five, Company A decides to downsize its operations and vacate one of the floors. Each of the leased floors is considered functionally independent. On June 30, 20X1, approximately one month before vacating the floor, Company A enters into a sublease with an unrelated third party, whereby the floor Company A is planning to vacate is leased for a period of three years of the remaining five years of the head lease term. The sublease rent per square foot is less than the head lease rent per square foot paid by Company A, and the sublessee does not have any renewal options. On July 31, 20X1, Company A downsizes its operations and vacates the leased floor.

For the sublet space, should the Company account for the transaction as the termination of a contract under ASC 420, Exit or Disposal Cost Obligations, or as a loss on a sublease in accordance with ASC 840-20-25-15?
PwC response
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.

6.5.4 Recording other costs related to exit/disposal activities

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 6.5.1.2). In addition, ASC 420-10 provides guidance for the subsequent accounting for those costs (see PPE 6.5.1.3).
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.)
  • The cost is not associated with or is not incurred to generate revenues after the communication date, and either:
o The cost is incremental to other costs incurred by the company prior to the communication date and will be incurred as a direct result of an exit plan; or
o The cost represents amounts to be incurred under a contractual obligation that existed prior to the communication date and will either continue after the exit plan is completed with no economic benefit to the company or be a penalty incurred by the company to cancel the contractual obligation.
For further considerations of the accounting for other exit costs, see Question PPE 6-7, Question PPE 6-8, and Question PPE 6-9.
Question PPE 6-7 (prior to ASC 842)

If a company adopts a restructuring plan that calls for the consolidation of eight facilities into four facilities, can management accrue all costs of consolidating the facilities at the communication date under ASC 420-10?
PwC response
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).
Question PPE 6-8

A company operates 100 retail outlets and has identified the specific location of 60 out of 70 stores that it intends to close pursuant to a store consolidation plan. The exit plan for the 60 stores identifies all significant actions and related costs in budget line item detail. Management believes the average cost to close the additional 10 stores will approximate the average cost of closing the identified 60 stores. Assuming that all other provisions of ASC 420-10 have been met, may the company recognize a liability at the communication date for the exit costs and involuntary termination benefits associated with all 70 stores?
PwC response
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.
Question PPE 6-9

A company enters into a long-term supply contract with a vendor for a component part previously produced internally. In connection with the contract, the company decides to close one of its plants that produced the component and the vendor agrees to reimburse all plant closing and employee severance costs. The vendor will not purchase any underlying plant assets and the company is not obligated to provide any separate services to or for the vendor such as marketing or advertising services. The vendor simply has agreed to reimburse the company for the costs associated with the closure of the plant as long as the company enters into a supply contract arrangement with the vendor. How should the company account for the vendor's reimbursement of its plant closing and severance costs?
PwC response
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 705-20-15-1 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.

6.5.5 Costs that do not qualify as exit costs under ASC 420-10

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:
  • costs to transition customers to a new product line or service;
  • franchisee incentive payments for equipment upgrades;
  • costs to modify executory contract arrangements (e.g., license and royalty arrangements, purchase or sales commitments, servicing arrangements); and
  • asset impairments for facilities that should follow the guidance in ASC 360-10.

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.
Question PPE 6-10

As part of its plan to consolidate manufacturing plants, a company intends to hire 300 individuals for its new facility. The company normally has a good flow of applications to draw from when routinely hiring employees. However, due to time constraints associated with the opening of the new facility, the company has engaged a recruiting firm to assist in the hiring of employees. The company expects that its hiring costs will increase significantly and wants to accrue the incremental amount over its normal hiring costs as part of its restructuring charge. Do such costs qualify as exit costs that can be accrued in accordance with the provisions of ASC 420-10?
PwC response
No. Such costs are related to ongoing or future operations and, therefore, would not qualify as exit costs.
Question PPE 6-11

The company expects to hire 40 hourly people to replace employees who left the company for employment elsewhere when they learned that the facility would be shut down as part of a restructuring plan. The new hires will be responsible for the clerical processing of sales, accounts receivable, and accounts payable at the facility for six months until the facility is shut down. Can the payroll costs of the new hourly hires be accrued as part of a restructuring charge?
PwC response
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.
Question PPE 6-12 (prior to ASC 842)

Company A exited its corporate facility on March 31, 20X4 under the terms of its operating lease. The lease agreement requires Company A to return the facility to the lessor in its original leased condition (i.e., the condition of the property at the inception of the lease). There are no significant leasehold improvements added by Company A that need to be removed; however, certain repairs and maintenance activities are required, such as repairing minor damage, painting, and other clean-up activities. Under ASC 420-10, can Company A accrue the estimated costs of repairing the facility as of March 31, 20X4, given its obligation for these costs under the lease?
PwC response
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.
Question PPE 6-13 (prior to ASC 842)

Company X ceased operations at its Belgian manufacturing center. Certain assets with a remaining net book value of $350,000 used for production have been dismantled and are being shipped to Brazil where they will be installed in the company's Brazilian plant and used for production. Total cost to relocate this equipment is expected to be $1.5 million. Management expects to use the equipment for five years in Brazil. The total cost of moving the old equipment to Brazil is significantly less than what it would cost to buy new equipment and have it installed.

Should the costs to dismantle, transport, and reassemble the manufacturing equipment be capitalized?
PwC response
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.
Question PPE 6-14 (prior to ASC 842)

Company A operates in the on-line photo business. Company A offers a wide-range of services, including the cloud-based storage of digital pictures, printing hard copies of pictures and printing hard copy picture books for customers. Each of the product lines constitutes a separate division within the company. Company A has an agreement with a sole-source provider ("vendor") to provide the materials utilized in the company's business (e.g., paper, ink, cardboard). As an incentive for Company A, under the firmly committed supply agreement, the vendor agreed to provide significant discounts on the price of future purchases of paper and ink if Company A agreed to also purchase a minimum amount of cardboard every month. There is no termination clause that would allow Company A to buy out of the arrangement, or reduce the amount of cardboard to be purchased per month (i.e., the agreement is non-cancelable).

On January 1, 20X6, the Board of Directors, along with management, enters into a plan to restructure the business and exit the picture book creation business. The company intends to continue to purchase paper and ink from the vendor, but will discontinue the purchase of cardboard. However, according to the agreement, the company is still required to pay for a minimum amount of cardboard per month.

How should Company A account for the remaining contract charges for the minimum required purchases of cardboard?
PwC response
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.
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