For some organizations, the disruption to the market or to client demand stemming from the COVID-19 pandemic may lead to the decision to materially change how you operate. The decision to undergo organizational restructuring is not a simple evaluation. It takes a team effort, from management, legal counsel, and corporate recovery professionals, among others. While accounting implications may not be top priority, there will nevertheless be some repercussions that management teams will need to evaluate when it comes time for financial reporting. Here are three ways your financial statement may be affected by organizational restructuring and transformation.
Disposal & Exit of Business Activities
Organizational restructuring often results in exiting from or disposing of activities of the entity, which incurs several types of costs. These may include the costs to terminate contracts (including lease termination costs if ASC Topic 842 has not been adopted), relocation costs, costs for closure of a facility, costs to terminate employees, and other costs. The accounting for these costs is generally done at fair value when the costs are incurred. For instance, the cost of security obtained for a shuttered facility would be recognized when the security is provided. However, the guidance around exit and disposal activities should be carefully reviewed as exceptions exists (pre-ASC 842 leases, for example) and not all charges will fall under the accounting prescribed in ASC 420 Exit or Disposal Cost Obligations. For example, restructurings may trigger impairments of existing long-lived assets, including property, plant and equipment and intangible assets, as well as goodwill and indefinite-lived intangibles.
A particularly challenging area during restructuring is the accounting for severance and other benefits provided to employees and to incentivize continued employment while exiting a business activity. For accounting purposes, there are several types of benefits that follow different accounting guidance and may have different timing of recognition. Employee termination benefits that trigger accounting events may take various forms, the most common of which are payments under:
- Ongoing benefit arrangements such as a written severance plan or an unwritten but substantive severance plan due to the company’s prior actions and communications with employees;
- One-time termination benefits;
- Enhanced benefits under an existing severance plan; and
- Individual employment contracts.
The substantive termination plan should be the basis for the accounting and represents the plan the employees have come to know and expect from the company’s past practice. Evaluating what type of benefit has been promised and when to recognize expense under the different accounting standards may require significant judgement.
One-time termination benefits are recognized at fair value immediately upon communication of an approved plan to the employees that have been identified to be terminated or over the period between the communication date and the termination date. On the other hand, ongoing benefit arrangements, for instance benefits prescribed upon termination in a union contract, may be recognized over the service period or when the benefits are probable of being incurred and reasonably estimable, depending on facts and circumstances. Another form of plan may be a voluntary termination benefit paid as an incentive for employees to terminate, which is recognized when the offer is accepted by the employee.
Presentation & Disclosure
The presentation and disclosure of restructuring charges should also be considered. A tabular reconciliation of the exit or disposal activity by major type of cost is the preferred presentation in the notes to the financial statements in the period the restructuring is initiated, as well as subsequent periods until the activity is completed.
The costs associated with a restructuring may fall into accounting for discontinued operations resulting in an after tax presentation below income from continuing operations, or, if they do not meet the definition of discontinued operations, as part of continuing operations. If charges do not meet the definition of a discontinued operation, often entities elect to present those charges as a separate line item within income from continuing operations. Public companies should take note, however. The SEC staff has previously stated that it is not appropriate to include a subtotal of continuing operations before restructuring charges and that it would only be appropriate to include restructuring charges related to items previously presented as “other income” within other income when using a multi-step income statement. Further, companies with a history of restructurings should not characterize the associated charges as “nonrecurring” if similar costs are presented within comparative years.
If your organization is undergoing restructuring, management teams may want to build in some additional time for financial statement reporting and review. Our team can also assist with additional questions or concerns that your organization may have about its restructuring accounting. Please contact Melissa Henry at firstname.lastname@example.org or by phone, 727.572.1400 for more information.
Published on August 03, 2020