IRS joins FASB on severance pay.
This was the case with severance payments. Although severance payments may produce some future benefits, such as operating costs reduction and increasing operating efficiencies, the payments are primarily a period expense because they principally relate to previously rendered services. Thus, severance payments are deductible business expenses.
Interestingly, this decision aligns the tax and accounting treatment of these termination payments. Emerging issues task force issue no. 94-3, Accounting for Restructuring Charges, also concluded that severance costs should be accrued at the time the corporation adopts a bona fide termination plan (see Financial Accounting: EITF Update, page 89).
Observation: Severance payments are deductible business expenses even though severance costs embody an element of future benefit--the matching principle overrode the future benefit principle with the result that current deduction is appropriate. --Robert Willens, CPA, managing director at Lehman Brothers, New York City.
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|Title Annotation:||Financial Accounting Standards Board|
|Publication:||Journal of Accountancy|
|Article Type:||Brief Article|
|Date:||Mar 1, 1995|
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