Financial Accounting: EITF update: accounting for certain restructuring charges in connection with a purchase business combination.
ISSUE NO. 95-3
The EITF addressed liability recognition of certain restructuring costs in EITF Issue no. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (see EITF Update, JofA, Mar.95, page 89). Now, in Issue no. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, the EITF addresses the accounting for certain restructuring costs in connection with a purchase business combination under Accounting Principles Board Opinion no. 16, Business Combinations.
The issue is what types of direct, integration or exit costs should be accrued as liabilities in a purchase business combination under Opinion no. 16, when to recognize those costs and what financial statement disclosures should be made.
The EITF identified three types of costs that, if certain conditions are met, should be recognized as liabilities assumed in a purchase business combination and included in the allocation of the acquisition cost in connection with a purchase business combination under Opinion no. 16. These include costs of a plan to (1) exit an acquired activity ("exit plan"), (2) involuntarily terminate acquired employees ("termination plan") or (3) relocate acquired employees ("relocation plan").
Costs to exit an activity of an acquired company. The EITF reached a consensus that an exit plan exists if all of the following conditions are met:
1. As of the consummation date of the acquisition, management having the appropriate level of authority begins to assess and formulate a plan.
2. As soon as possible after the consummation date, management having the appropriate level of authority completes the assessment of which acquired activities to exit and approves and completes the combined company to the plan. Although the time required will vary with the circumstances, the plan cannot be finalized more than one year after the acquisition's consummation date.
3. The exit plan specifically identifies all significant actions to be taken to complete the plan, acquired activities that will not be continued (including the method of disposition and location of those activities) and the plan's expected completion date.
4. Actions required by the plan will begin as soon as possible after the plan is finalized, and the period of time to complete the plan indicates that significant changes to it are unlikely.
The EITF also reached a consensus that a cost resulting from an exit plan should be recognized as a liability assumed as of the acquisition's consummation date only if the cost is not associated with or is not incurred to generate revenues of the combined entity after the consummation date and it meets either criterion (1) or (2) below. The EITF observed that these criteria are essentially the same as those in Issue no. 94-3 for the recognition of exit costs. (See EITF Abstracts, exhibit 94-3A, for examples illustrating the application of the criteria in Issue no. 94-3, which may be helpful in applying the criteria below.)
1. The cost has no future economic benefit to the combined company, is incremental to other costs incurred by either the acquired or acquiring company in the conduct of activities before the consummation date and will be incurred as a direct result of the exit plan. The notion of incremental does not contemplate a diminished future economic benefit to be derived from the cost but rather the absence of the cost in either company's activities immediately before the consummation date.
2. The cost represents an amount to be incurred by the combined company under a contractual obligation of the acquired company that existed before the consummation date and will either continue after the plan is completed with no economic benefit to the combined company or be a penalty incurred by the combined company to cancel that contractual obligation.
Termination benefits and relocation costs. The EITF reached a consensus that termination benefits and relocation costs should be recognized as liabilities assumed as of the consummation date of the purchase business combination and included in the allocation of the acquisition cost if all of the following criteria are met:
1. As of the consummation date of the acquisition, management having the appropriate level of authority begins to assess and formulate a plan to involuntarily terminate (relocate) acquired employees.
2. As soon as possible after the consummation date, management having the appropriate level of authority completes the identification of which acquired employees will be involuntarily terminated (relocated), approves and commits the combined company to the termination (relocation) plan and communicates the termination (relocation) arrangement to the acquired employees. The communication of the termination (relocation) arrangement should include sufficient detail to enable acquired employees to determine the type and amount of benefits they will receive if they are terminated (relocated). Although the time required will vary with the circumstances, the finalization of the termination (relocation) plan and the communication of the termination (relocation) arrangement cannot occur beyond one year from the consummation date of the acquisition.
3. The termination (relocation) plan specifically identifies the number of acquired employees to be terminated (relocated), their job classifications or functions and their locations.
4. Actions required by the termination (relocation) plan will begin as soon as possible after the plan is finalized, and the period of time to complete the plan indicates that significant changes to it are unlikely.
The EITF agreed that costs (such as integration costs) related to acquired activities or employees that do not meet either set of conditions described above are indirect and general expenses related to the acquisition and are not recorded as part of the purchased entity.
The EITF also agreed that initial or revised plan actions relating to exit, termination relocation plans that result from events occurring after the consummation date (for example, current operating results) do not result in an element of cost of the acquired company. These costs should be expensed or capitalized when incurred based on the nature of the expenditure and the capitalization policy of the combined company.
The EITF observed that costs related to activities or employees of the acquiring company are not considered in the purchase price allocation because the cost of the acquisition is not allocated to the assets and liabilities of the acquiring company as discussed in FASB Technical Bulletin no. 85-5, Issues Relating to Accounting for Business Combinations.
The EITF also reached a consensus that when the ultimate amount of a cost expended is less than the amount recorded as a liability assumed in a purchase business combination (that is, an over accrual) as a result of applying the above consensuses, the excess should reduce the cost of the acquired company (that is, reduce goodwill). The amount of a cost exceeding the amount recorded as a liability assumed in a purchase business combination (that is, an under accrual) should result in an additional element of cost of the acquired company if an adjustment to an original estimate is determined within one year of the acquisition date. Thereafter, however, the excess cost should be included in the determination of net income in the period in which the adjustment is determined. The EITF observed that costs related to exit, termination and relocation plans that were recorded as part of a purchased entity under this Issue were not preacquisition contingencies accounted for under FASB Statement no. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. They do not meet the definition of "preacquisition contingencies" because they arise from the acquisition and did not exist before it.
Disclosures. The EITF reached a consensus that the combined company should disclose the following items in the notes to the financial statements, for the period in which a purchased business combination occurs, in addition to the disclosures required by paragraphs 95 and 96 in Opinion no. 16. They should be disclosed only if the, activities of the acquired company that will not be continued are significant to the combined company's revenues or operating results or if the costs recognized under the consensuses as of the consummation date are material to the combined company.
* A description of unresolved issues - the types of additional liabilities that may result in an adjustment to the allocation of the acquisition cost for the business combination and how any adjustments will be reported - if the acquiring company has not finalized an exit, termination or relocation plan as of the balance sheet date.
* A description of the type and amount of liabilities assumed and included in the acquisition cost allocation for costs to exit an activity, termination benefits or relocation costs.
* A description of the major actions in the exit, termination or relocation plan; acquired activities that win not be continued (including the method of disposition) and the anticipated date of completion; and a description of employee groups to be terminated (relocated).
The notes to the combined company's financial statements should disclose the following, for all periods presented subsequent to the acquisition date in which a purchase business combination occurred, through and including the period in which all actions under an exit, termination or relocation plan have been fully executed.
* A description of the type and amount of costs to exit an activity, termination benefits or relocation costs paid and charged against the liability.
* The amount of any adjustments to the liability account and whether the corresponding entry was an adjustment of the cost of the acquired company or included in the determination of net income for the period.
The Securities and Exchange Commission observer stated that the SEC staff expected registrants to follow the requirements of SEC Staff Accounting Bulletin no. 92, Accounting and Disclosures Relating to Loss Contingencies, for unresolved preacquisition contingencies resulting from a business combination and intended to monitor SAB no. 92 and Issue no. 95-3 disclosures closely.
EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.
* EITF Issue no. 95-3
Accounting problem: (1) Should a company recognize a liability assumed as part of the purchase price allocation in a purchase business combination for costs of a plan to exit an activity of an acquired company, involuntarily terminate employees of an acquired company or relocate employees of an acquired company, if certain conditions are met? (2) Should additional financial statement disclosures be made for these costs? Consensus: (1) Yes. (2) Yes.
By LINDA C. DELAHANTY, CPA, technical manager, and LINDA A. VOLKERT, CPA, senior technical manager, of the AICPA technical information division.
[TABULAR DATA OMITTED]
|Printer friendly Cite/link Email Feedback|
|Title Annotation:||AICPA emerging issues task force|
|Author:||Volkert, Linda A.|
|Publication:||Journal of Accountancy|
|Date:||Nov 1, 1995|
|Previous Article:||Which GAAP should NPOs apply?|
|Next Article:||Corporate and partnership formations involving underwritings.|