memo
To: Pharma Co.
From: Chao Sun
Re: Restructuring Costs
Date: Sep 28, 2014
Background
Pharma Co. is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. Pharma Co. is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area as part of the restructuring a business line. The relocation plan related to the following facts:
Facts Financial affection
Dec 15, 2010, issued a press release to terminate the lease of the old facility.
Jan 31,2011,at which time it will sign the lease termination agreement, Pharma Co. plans to vacate the Plant A facility. The lease is an operating lease with termination fee is $1.3M. The lease was entered into in Feb 2004 with a term of 10 years.
The written notice is required for early termination.
Dec 27, 2010, communicated the main features of a one-time, nonvoluntary termination plan to its employees. The reduction includes approximately 120 employees, which represents 10 percent of workforce without identified the specific employees. The workforce reduction is expected to be completed by Jan 31, 2011, and is expected to cost approximately $3 million.
Pharma Co. has entered into irrevocable contracts with certain other relevant parties to affect the restructuring plan. Relocation cost: $500,000
Staff training cost: $1.5M.
Pharma Co. stated its intention to dismantle the existing operation. The cost to dismantle the existing manufacturing operation is estimated to be $1M. There is no legal obligation for dismantling plants when abandoned.
Issue
How should Pharma Co. account for the restructuring program for the year ended Dec 31, 2010 under U.S. GAAP?
Analysis
FASB Accounting Standards Codification (ASC) Subtopic 420-10 Exit or Disposal Cost Obligations presents the relevant guidance on cost obligations. Per ASC
From: Chao Sun
Re: Restructuring Costs
Date: Sep 28, 2014
Background
Pharma Co. is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. Pharma Co. is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area as part of the restructuring a business line. The relocation plan related to the following facts:
Facts Financial affection
Dec 15, 2010, issued a press release to terminate the lease of the old facility.
Jan 31,2011,at which time it will sign the lease termination agreement, Pharma Co. plans to vacate the Plant A facility. The lease is an operating lease with termination fee is $1.3M. The lease was entered into in Feb 2004 with a term of 10 years.
The written notice is required for early termination.
Dec 27, 2010, communicated the main features of a one-time, nonvoluntary termination plan to its employees. The reduction includes approximately 120 employees, which represents 10 percent of workforce without identified the specific employees. The workforce reduction is expected to be completed by Jan 31, 2011, and is expected to cost approximately $3 million.
Pharma Co. has entered into irrevocable contracts with certain other relevant parties to affect the restructuring plan. Relocation cost: $500,000
Staff training cost: $1.5M.
Pharma Co. stated its intention to dismantle the existing operation. The cost to dismantle the existing manufacturing operation is estimated to be $1M. There is no legal obligation for dismantling plants when abandoned.
Issue
How should Pharma Co. account for the restructuring program for the year ended Dec 31, 2010 under U.S. GAAP?
Analysis
FASB Accounting Standards Codification (ASC) Subtopic 420-10 Exit or Disposal Cost Obligations presents the relevant guidance on cost obligations. Per ASC