Applying the Right Accounting Model for Pandemic-Related Changes in Workforce
The business community continues to be affected by COVID-19 and its related economic impacts. Some companies that are negatively impacted may need to restructure their business in order to reduce operating expenditures. Such restructurings may result in terminating employees. This article focuses on the accounting considerations for employee termination benefits.
Are the Termination Benefits Considered to be Part of a One-time Arrangement or an Ongoing Benefit Arrangement?
The threshold question is whether any benefits paid to employees who are involuntarily terminated should be considered to be part of a one-time arrangement that is subject to the guidance in Accounting Standard Codification Topic (“ASC”) 420, Exit or Disposal Cost Obligations, or an ongoing benefit arrangement that is subject to ASC 712, Compensation – Nonretirement Postemployment Benefits.
The answer to that question matters because the different accounting models may result in different timing in the recognition of the related costs. In particular, ASC 712 generally requires recognition of a liability when it is probable that employees will be entitled to benefits and the amount can be reasonably estimated, which often would occur before the communication date required for recognition under ASC 420.
Determining whether it is an ongoing arrangement requires consideration of both the form and substance of the arrangement. For instance, the benefits may be statutorily required, or otherwise subject to a written policy regarding involuntary termination benefits. Alternatively, the terms of prior layoffs may have established a precedent that creates an expectation on the part of employees of what termination benefits they will receive.
ASC 420 acknowledges this possibility, stating, in part, that “[a]bsent evidence to the contrary, an ongoing benefit arrangement is presumed to exist if an entity has a past practice of providing similar termination benefits.”1 Termination benefits that exceed past packages may still be deemed to be part of an ongoing benefit plan if such changes are considered to be an enhancement to the ongoing arrangement that is expected to be applicable in the future.
1: See ASC 420-10-55-1.