Restructuring Costs Essay

pharmaceutical company Co. is a U.S. subsidiary of a U.K. entity that prep ars its financial statements in accordance with (1) U.S. generally accepted accounting principles for reporting to its U.S.-based l fetch uper and (2) IFRSs in reporting to its pargonnt. pharmaceutical company Co. is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area as part of the restructuring a business line. The relocation computer programme related to the spare-time employment facts Facts Financial fancy declination 15, 2010, issued a press release to terminate the lease of the over-the-hill facility. Jan 31,2011,at which time it pass on sign the lease destination agreement, Pharma Co. plans to part with the Plant A facility. The lease is an operating lease with margin earnings is $1.3M. The lease was entered into in Feb 2004 with a term of 10 years. The written nib is required for early finis.Dec 27, 2010, commu nicated the main features of a one-time, nonvoluntary breathing out plan to its employees. The reduction includes approximately 120 employees, which represents 10 percent of men without identified the specific employees. The workforce reduction is expected to be accurate by Jan 31, 2011, and is expected to cost approximately $3 million. Pharma Co. has entered into irrevokable draws with certain other relevant parties to affect the restructuring plan. Relocation cost $500,000 cater training cost $1.5M.Pharma Co. stated its intention to dismantle the quick operation. The cost to dismantle the existing manufacturing operation is estimated to be $1M. T present is no legal obligation for rase plants when abandoned. IssueHow should Pharma Co. account for the restructuring broadcast for the yearend Dec 31, 2010 under U.S. GAAP? AnalysisFASB account Standards Codification (ASC) Subtopic 420-10 Exit or Disposal apostrophize Obligations presents the relevant guidance on cost obligati ons. Per ASC 420-10-25-12, Contract Termination Costs include A liability for costs to terminate a contract before the end of its term shall be recognized when the entity terminates the contract in accordance with the contract terms ( for example, when the entity gives written nonice to the counterparty within the notification period condition by the contract or has otherwise negotiated a term with the counterparty) Although Pharma Co. issued a press release to terminate the lease at Dec 15, 2010, this fact did not reach an agreement. So Pharma Co. do not unavoidableness record the $1.3 termination fee until Jan 31,2011, which was the date sign the termination agreement. One-time employee termination clearsUnder ASC 420-10-25-4 requirement, an arrangement for one-time employee termination benefits should meet all the following requirements a. Management, having the authority to approve the action, commits to a plan of termination. b. The plan identifies the number of employees to be terminated, their job classifications or functions and their location, and the expected completion date. c. The plan establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination (including but not limited to immediate payment payments). In sufficient detail to enable employee to determine the type and summation of benefits they will receive if they are involuntarily terminated. d. Actions required to complete the plan indicate that it is unlikely that signifi lavatoryt changes to the plan will be make or that the plan will be withdrawn. Pharma Co. already sanctioned the employee termination plan in the appendix B with 120 employees at current location. This workforce reduction was expected to be completed by Jan 31, 2011. Although there is no details in appendix B, employees still can information of termination benefit from parley with CEO.Since this is a nonvoluntary termination plan, we are sure that Pharma Co. shou ld recognize the one-time employee termination benefits for the year ended Dec 31, 2010 under GAAP requirement. One-time employee termination benefitsAs the appendix B posted, the employees are not terminated their service or received their benefits. According to the ASC420-10-30-5, If employees are not required to shape service until they are terminated in order to receive the termination benefits (that if, is employees are entitled to receive the termination benefits regardless of when they leave) or if employees will not be retained to render service beyond the minimum retention period, a liability for the termination benefits shall be measured at its fair treasure at the communication date. Therefore, $3M approximately cost could not record instead of its fair value at Dec 27, 2010. Relocation Cost and Staff Training CostAlthough Pharma Co. has entered into irrevocable contracts with certain other relevant parties, since they do not mention the specific time to start the relo cation program, it is not need to recognized those future expense until it is really paid. Dismantling CostAs ASC 420-10-25-15 notes about associated costs, The liability shall not be recognized before it is incurred, level if the costs are incremental to other operating costs and will be incurred as a direct result of a plan. A liability for other costs associated with an exit or disposal activity shall be recognized in the period in which the liability is incurred (generally, when goods or services associated with the activity are received). So the main point here is whether the dismantling activates happened, not what it is related to. Therefore, Pharma Co. should not recognize the dismantling cost for the year ended Dec 31, 2010.