4.14 Liabilities for Exit or Restructuring Activities
ASC 805-20
25-2 To qualify for recognition as part of applying the acquisition method, the identifiable assets acquired
and liabilities assumed must meet the definitions of assets and liabilities in FASB Concepts Statement No.
6, Elements of Financial Statements, at the acquisition date. For example, costs the acquirer expects but
is not obligated to incur in the future to effect its plan to exit an activity of an acquiree or to terminate the
employment of or relocate an acquiree’s employees are not liabilities at the acquisition date. Therefore, the
acquirer does not recognize those costs as part of applying the acquisition method. Instead, the acquirer
recognizes those costs in its postcombination financial statements in accordance with other applicable
generally accepted accounting principles (GAAP).
The costs that the acquirer expects to incur in the future related to its plans to (1) exit an activity,
(2) involuntarily terminate employees, or (3) relocate the acquiree’s employees (commonly called
restructuring costs) generally would not qualify as liabilities assumed in the business combination. To
qualify as such, the restructuring costs would need to meet the recognition criteria in ASC 420-10 as of
the acquisition date. ASC 420-10-25-2 states:
A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability
included in FASB Concepts Statement No. 6, Elements of Financial Statements, is met. Only present obligations
to others are liabilities under the definition. An obligation becomes a present obligation when a transaction or
event occurs that leaves an entity little or no discretion to avoid the future transfer or use of assets to settle
the liability. An exit or disposal plan, by itself, does not create a present obligation to others for costs expected
to be incurred under the plan; thus, an entity’s commitment to an exit or disposal plan, by itself, is not the
requisite past transaction or event for recognition of a liability.
An acquirer is not likely to meet the recognition criteria in ASC 420-10 as of
the acquisition date unless the acquiree previously recognized a restructuring
liability in accordance with ASC 420-10 in its preacquisition financial statements
and the acquirer assumes that obligation. An entity should carefully examine an
arrangement that the acquiree entered into after negotiations for the business
combination had started to determine whether it meets the criteria to be recognized
as part of the business combination (see Section 6.2).