Exit and Disposal Activities
Exit and disposal activities under ASC 420 involve costs associated with restructuring, plant closings, or other exit plans, recognized as liabilities when incurred rather than when management commits to a plan.
Explanation
One-time termination benefits are recognized when the plan is communicated to employees and employees are not required to render future service. If future service is required, the liability is recognized ratably over the future service period. Contract termination costs are recognized when the entity terminates the contract. Other associated costs (relocation, legal) are recognized when incurred.
Assets to be disposed of by sale are classified as held for sale when specific criteria are met and measured at the lower of carrying amount or fair value less costs to sell. Depreciation ceases when an asset is classified as held for sale.
Key Points
- •Costs recognized when the liability is incurred, not when management commits
- •One-time termination benefits: recognized when communicated if no future service required
- •Held-for-sale assets: lower of carrying amount or fair value less costs to sell
- •Depreciation stops when asset classified as held for sale
Exam Tip
Focus on when the liability is recognized — it varies by type of cost. One-time benefits, contract terminations, and other costs each have different timing rules.
Frequently Asked Questions
Related Topics
Balance Sheet (Statement of Financial Position)
The balance sheet reports an entity's assets, liabilities, and equity at a specific point in time, following the fundamental accounting equation: Assets = Liabilities + Equity.
Contingencies and Commitments
A contingency is an existing condition involving uncertainty about possible gain or loss that will be resolved when future events occur, accounted for under ASC 450.
Income Statement
The income statement reports an entity's revenues, expenses, gains, and losses over a period of time, resulting in net income or net loss.
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