Exit or Disposal Cost Obligations, ASC 420

Exit or Disposal Cost Obligations
SFAS 146, June 2002
“Accounting for Costs Associated with Exit or Disposal Activities”

Exit or disposal cost obligations
1. Costs to terminate a contract other than a capital lease
2. Costs to close facilities and relocate employees
3. One-time employee termination benefits

Initial measurement
1. A liability for exit or disposal costs is recognized
–> when the liability is incurred

2. Initially measured at fair value

3. If fair value cannot be reasonably estimated
–> a liability is recognized when fair value can be reasonably estimated

One-time employee termination benefits
1. If employees are required to provide service
–> until they are terminated to received termination benefits
–> termination benefits liability is measured at the communication date
–> based on (A)
(A) the fair value at termination date

2. If employees are not required to provide service
–> until they are terminated to received termination benefits
–> termination benefit liability is measured at (B)
(B) the fair value at communication date

Subsequent measurement
1. Changes to the liability are measured
–> using “credit-adjusted risk-free rate”

2. Changes due to (C) are recognized
–> as an increase in the liability and
–> as an expense
(C) the passage of time

3. Cumulative effect of changes due to (D)
–> adjusts the liability when the change occurs
(D) the revisions to estimated cash flows

 

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