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).
Pending Content (Transition
Guidance: ASC 105-10-65-9)
25-2 To qualify for recognition as part
of applying the acquisition method, the
identifiable assets acquired and liabilities
assumed must exist 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.
Pending Content (Transition
Guidance: ASC 105-10-65-9)
A liability for a cost associated with an exit
or disposal activity is incurred when a
transaction or event occurs that creates a present
obligation of an entity to transfer an economic
benefit. 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).