Exit or Disposal Cost Obligations, ASC 420

SFAS 146, June 2002
“Accounting for Costs Associated with Exit or Disposal Activities”

1. Costs to terminate a contract other than a capital lease
2. Costs to close facilities and relocate employees
3. One-time employee termination benefits

1. A liability for exit or disposal costs is recognized
–> when the liability is incurred

2. Initially measured at fair value

3. If fair value cannot be reasonably estimated
–> a liability is recognized when fair value can be reasonably estimated

1. If employees are required to provide service
–> until they are terminated to received termination benefits
–> termination benefits liability is measured at the communication date
–> based on (A)
(A) the fair value at termination date

2. If employees are not required to provide service
–> until they are terminated to received termination benefits
–> termination benefit liability is measured at (B)
(B) the fair value at communication date

1. Changes to the liability are measured
–> using “credit-adjusted risk-free rate”

2. Changes due to (C) are recognized
–> as an increase in the liability and
–> as an expense
(C) the passage of time

3. Cumulative effect of changes due to (D)
–> adjusts the liability when the change occurs
(D) the revisions to estimated cash flows