IAS 37 informs the timing and measurement of restructuring provisions.
Authors: Valerie Boissou, Ingo Zielhoff, and Carolina Haendeler
Both IFRS Accounting Standards and US GAAP mandate the recognition of certain restructuring costs in financial statements prior to the actual restructuring. Identifying the costs to include in a restructuring provision demands careful judgment. Also, companies need to consider separately the terms and conditions of employee termination benefits because they are subject to specific requirements and the timing of their recognition may differ from that of other restructuring costs. Current US GAAP guidance differs from IFRS Accounting Standards in some respects, potentially resulting in a different timing for recognition of related costs.
IAS 371 defines restructuring as 鈥渁 program that is planned and controlled by management, and materially changes either the scope of a business undertaken by a company or the manner in which that business is conducted.鈥�
Understanding the nature of the related costs matters. Restructuring activities often include terminating employment relationships. Costs related to such terminations are not in the scope of IAS 37 but are accounted for under the employee benefits guidance in IAS 192 and, as a result, may need to be recognized earlier than other restructuring costs. Their accounting is discussed below in this article.
US GAAP3 uses the term 'exit activities', which describes broadly all exit activities that do not involve a newly acquired business or the disposal of a business. Not all exit activities may qualify to be accounted for as restructuring under IFRS Accounting Standards.
Understanding the nature of the costs to be incurred under the restructuring program also matters under US GAAP. Unlike IFRS Accounting Standards, US GAAP divides exit activities into three types of cost to which specific accounting requirements apply:
Restructuring costs other than employee termination benefits are accrued 鈥� i.e. a provision is recognized 鈥� when there is a present obligation (legal or constructive) resulting from a past event, it is more likely than not that there will be an outflow of resources and a reliable estimate of costs can be made. Restructurings are rarely legally required but are rather decided by management for business reasons. Therefore, determining whether a constructive obligation exists is the key challenge for deciding when to record a restructuring provision.
IAS 37 explains that a constructive obligation for a restructuring arises only when:
For example, suppose a company decides to close one of its production facilities as a result of a geopolitical event. The table below outlines the key requirements for recognizing a provision for the corresponding restructuring costs, under IAS 37.
Given the level of judgment involved, companies should develop processes and controls to support their determination of whether a constructive obligation exists.
Further, IFRS Accounting Standards do not specifically address provisions for contract termination costs. In our view, the costs of cancelling or terminating a contract should not be recognized until the contract is actually terminated, unless the contract becomes onerous. For more information about onerous contracts, read 乐鱼（Leyu）体育官网 article, Do you have an onerous contract?
Unlike IFRS Accounting Standards, under US GAAP when the company will continue to incur costs under the remaining term of a contract without receiving economic benefit (i.e. the contract is onerous), a provision for those costs is not recognized until the company permanently ceases using the rights granted under the contract. Therefore, the timing of recognition of such costs is likely to be later than under IFRS Accounting Standards.
Unlike IFRS Accounting Standards, under US GAAP all other costs associated with exit activities are recognized when the liability is incurred, which is generally in the period in which the goods or services (e.g. relocation services) are received.
Only incremental costs that are directly associated with the restructuring are included in the provision. Additionally, IAS 37 prohibits the recognition of a provision for costs associated with ongoing activities, such as the cost of training or relocating continuing staff. As a result, companies should carefully analyze their restructuring costs.
Once the nature of the restructuring costs has been identified, the provision is measured at the best estimate of the anticipated costs. That amount is discounted using a pre-tax rate that reflects both the time value of money and risks specific to the liability, if the financing component is material.聽
The measurement of costs associated with exit activities under US GAAP depends on the applicable Codification Topic/Subtopic and can result in differences from IFRS Accounting Standards. This table summarizes measurement of exit costs other than employee termination benefits.
Restructurings are often triggered by mergers and acquisitions. Under the business combination guidance,4 an acquirer recognizes in the opening balance sheet on the acquiree restructuring obligations of the acquiree that exist at the date of acquisition and are assumed by the acquirer as part of the acquisition. Conversely, costs for planned or future actions of an acquirer are not recognized as a liability in the opening balance sheet.
This means that a restructuring initiated by the acquiree before the acquisition affects goodwill in the consolidated financial statements of the acquirer, while a restructuring initiated by the acquirer impacts profit or loss.
Like IFRS Accounting Standards, US GAAP does not allow costs for planned or future actions of an acquirer to be recognized as a liability in the opening balance sheet on the acquiree.聽
Employee termination benefits are provided in exchange for the termination of an individual's employment, outside of normal retirement. While termination benefits represent one of the most common types of restructuring costs, they can also be payable outside of a restructuring program.
Employee termination benefits are in the scope of IAS 19 rather than IAS 37. The associated costs are recognized when the company can no longer withdraw the offer of those benefits. This may be earlier than when other restructuring costs are recognized, and typically before the benefits are paid. Assessing the point at which an offer cannot be withdrawn may be complex and depends on whether the employee's acceptance is required 鈥� i.e. the termination is voluntary rather than involuntary.
Companies should also carefully assess the terms and conditions of the termination benefits arrangement to ensure that the benefits are indeed termination rather than post-employment benefits. Benefits conditional on future services (i.e. that are provided in exchange for services) are considered post-employment benefits and are accrued over an employee鈥檚 service period rather than at a single point in time.
Under US GAAP, the recognition of termination benefits depends on whether they are one-time benefits, contractual termination benefits, or benefit payments under an ongoing plan.
For example, severance benefits required by the terms of a plan only if a specified event occurs, such as a plant closure, are considered contractual termination benefits and in the guidance on other post-employment benefits under US GAAP. Contractual termination benefits are recognized when it is probable the employee is entitled to the benefit and the amount is reasonably estimable without the need for communication to affected employees. IAS 19 does not specifically address contractual termination benefits, and as a result, differences may exist between US GAAP and IFRS Accounting Standards for the recognition timing and the measurement of such benefits. Contractual termination benefits are relatively common in the US and thus could result in a significant acceleration of the recognition of the cost or liability under US GAAP compared to IFRS Accounting Standards.
Read our IFRS Perspectives article,聽Termination benefits and furloughs: IFRS庐 Standards vs. US GAAP, for more insights on the differences between IFRS Standards and US GAAP for termination benefits.
The International Accounting Standards Board (IASB) is revisiting general guidance on the timing of recognition of provisions, costs and discount rates. However, these are not expected to impact the accounting for restructuring
Read 乐鱼（Leyu）体育官网 IFRS Perspectives article,聽Proposed changes to provisions under IFRS Accounting Standards, for more insights on the proposed amendments.
Determining when to recognize a restructuring provision requires careful analysis of the facts to determine whether a constructive obligation exists. Identifying which costs should be included in the measurement of the restructuring provision, developing a best estimate of those costs and also requires judgment and supportable cash flow projections.
Companies should also pay close attention to the terms and conditions of employee termination benefits arrangements (voluntary versus involuntary) and whether the payments are conditional on future services to determine the appropriate timing of recognition, which may differ from the timing of recognition of other restructuring costs.
Finally, the US GAAP guidance for exit costs presents several differences with IFRS Accounting Standards, which may lead to later recognition of related costs under US GAAP.
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