FAR, Financial Accounting and Reporting
Sources for Exit or Disposal Cost Obligations
Last reviewed
The standards and authorities behind PocketCPA's FAR lessons on Exit or Disposal Cost Obligations. The topic rests on ASC 420.
About this topic
When a company decides to shut a plant, exit a product line, or lay off part of its workforce, the announcement usually arrives long before the cash does. ASC 420 answers one question about that gap: at what moment does the intention become a liability.
The answer the Topic gives is deliberately unfriendly to management. A plan is not a liability, however detailed it is and however firmly the board has committed to it. Something has to happen to somebody outside the company before anything is recorded.
Key points
- One-time termination benefits are recognized at the communication date if the plan meets specific criteria.
- Contract termination costs are recognized at the cease-use date, not the decision date.
- Costs to consolidate facilities or relocate employees are recognized when incurred.
- The liability is measured at fair value; subsequent changes are recognized in the period they occur.
What the lessons cover
- What ASC 420 reaches, and what it does not (ASC 420-10-15-3)
- A plan is not a liability (ASC 420-10-25-1 and 25-2)
- One-time termination benefits: the communication date (ASC 420-10-25-4)
- The service test decides the pattern (ASC 420-10-25-8 and 25-9)
- Contract termination costs (ASC 420-10-25-11 through 25-13)
- Other associated costs (ASC 420-10-25-15)
- Measurement: fair value first, then accretion (ASC 420-10-30-1 and 35-1)
- Reversal, presentation, and disclosure (ASC 420-10-45-3)
Authoritative references
- ASC 420-10-05-2 and 420-10-15-3, the scope of exit and disposal cost obligations, as amended by ASU 2016-02, and the costs the Topic does not reach.
- ASC 420-10-25-1 and 25-2, a plan is not a liability: the cost is incurred when it meets the definition of a liability in Concepts Statement 6.
- ASC 420-10-25-4, one-time termination benefits and the communication date.
- ASC 420-10-25-8 and 25-9, recognition of the full fair value at once where no future service is required, and ratable recognition over the future service period where it is.
- ASC 420-10-25-11 through 25-13, contract termination costs: recognized at fair value when the contract is terminated under its terms, or at the cease-use date for costs under a contract that continues.
- ASC 420-10-25-15, costs to consolidate or close facilities, recognized when the services are received.
- ASC 420-10-30-1 and 35-1, measurement at fair value first, then accretion, with changes measured using the same credit-adjusted risk-free rate.
- ASC 420-10-30-8 and 55-11 through 55-15, the operating-lease guidance superseded by ASU 2016-02, with links to the ASC 842 transition paragraphs.
- ASC 420-10-45-3, reversal, presentation, and disclosure.
- ASC 805-20-25-2, costs the acquirer expects but is not obligated to incur are not liabilities at the acquisition date.
Related requirements outside the Topic:
- Impairment or disposal of the long-lived assets themselves, ASC 360 and ASC 205-20.
- Contingencies, ASC 450.
- Postemployment and postretirement benefits, ASC 712 and ASC 715.
- Leases, ASC 842.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.