Statement of Relevant Facts:
The Rump Organization, a SEC registrant, is planning a corporate restructuring plan. On December 27, 2005 Ronald Rump, the CEO of the organization, along with the Board of Directors approved a plan to involuntarily terminate 100 of the organization’s employees. There is an option for each of the employees to sign a litigation waiver, which forfeits any right they have for legal action against Rump. In exchange for their voluntary signing of the waiver, Rump will offer each employee a lump-sum cash payment equivalent to one month’s salary.
If they refuse to sign the waiver they will not receive any severance benefits. The employees in question will not be able to retain their job regardless of whether the waiver is or is not signed. There are a few additional facts presented along with the case: The corporate restructuring plan identifies the number of employees to be terminated, job classifications, and locations of the employees. The completion date of the plan is January 31, 2006 and employees are allowed to leave Rump at any time on or before the date of completion.
The employees must sign the waiver before this date in order to claim their severance benefits. On December 31, 2005 all of the employees affected by the plan were e-mailed a summary of the plan’s terms and were informed about the option to sign the litigation waiver. Rump believes that there will be no significant change to the plan and asserts it will not be withdrawn before the execution. Rump does not have a policy on severance payments made to employees but in the past has offered benefits to employees being terminated due to workforce reduction plans.
Identification of Issues and Alternatives:
The primary question asked in the case is if Rump should recognize a liability for the expected employee termination benefits as of December 31, 2005. If the termination is considered involuntary, a liability will be recorded on the communication date. Alternatively, if the employee’s termination is considered voluntary a liability will be recorded when the employee leaves the company (ASC 712-10-25-1). In order to answer this question we need to establish the communication date in the case. After establishing the communication date we need to determine if all criteria presented in ASC 420-10-25-4 are satisfied. An additional issue is if the past one-time severance benefit offered to employees being terminated could be considered an enhancement to an ongoing benefit arrangement. If it is considered an enhancement, the liability would be recognized when it is probable that a future settlement will be reached (ASC 420-10-55-18).
Conclusions and Authoritative Reasoning:
Below is a summary of our conclusions and authoritative reasoning for each of the provisions: 1. We conclude that Rump should recognize the liability for the expected employee termination benefits on the communication date, upon meeting all four criteria presented in ASC 420-10-25-4 and communicated to the employees, which is December 31, 2005. We believe that the termination of the employees is involuntary. We also concluded that the benefit arrangement is not to be treated as an enhancement to an ongoing benefit arrangement. a. Following is a discussion of the four criteria presented in ASC 420-10-25-4: i. “Management, having the authority to approve the action, commits to a plan of termination.” Rump, the CEO, and Board of directors approved the plan on December 27, 2005. ii. “Plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and expected completion date.” Rump’s plan includes 100 employees, the job classification, location of each employee, and a January 31, 2006 completion date. iii. “The plan establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated.” The plan in the case explicitly states that the employees will receive termination benefits upon signing the litigation waiver on or before January 31, 2006. iv. “Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.” Rump concludes it’s unlikely the plan will have major changes or will be withdrawn. b. Based on the above criteria being satisfied, ASC 420-10-25-8 states “if employees are not required to render services until they are terminated in order to receive the termination benefits (regardless of when they leave)….a liability for the termination benefits shall be recognized at the communication date.” As stated above our communication date is December 31, 2005 established by this codification section, after which employees can leave anytime which means their services are not required for termination benefits.
2. An alternative position we have considered:
a. Rump satisfies the above criteria based on management’s assertion that it is unlikely that a significant change will happen to the plan and/or be withdrawn before completion. From an auditor’s perspective we need to be leery on management’s assertion as to whether or not they are looking out for the best interest of the employees. b. ASC 420-10-55-1 states “Absent evidence to the contrary, an ongoing benefit arrangement is presumed to exist if an entity has a past practice of providing similar termination benefits.” i. It can be argued that since Rump had offered a one-time severance benefits to employees in the past an ongoing benefit arrangement is presumed to exist. However, since Rump varied the past severance benefits based on the facts of each individual situation and does not have a general policy regarding severance payments, we believe that this presents a weak argument for trying to recognize the liability in this manner. We also believe precedence or a formal written guideline would be needed for the company to seek this treatment. c. We believe the alternative’s arguments are not strong enough to influence our decision on recognizing a liability for the expected employee termination benefits on another date.
Future Standards Changes & IFRS Impact:
In June 2005 exposure draft IAS 37 Provisions, Contingent Liabilities and Contingent Assets was published dealing with termination benefits of employees. On June 16, 2011 the IASB issued IAS 19 Employee Benefits which made finalized amendments to the exposure draft and became effective on January 1, 2013. The board proposed to clarify the definition of termination benefits to make clear that the benefits are in exchange for employee’s acceptance of voluntary redundancy. In our case the benefits were in exchange for a waiver of any rights to file litigation against Rump, these benefits would then be considered postemployment benefits which would be handled differently than termination benefits. Also the board proposed that involuntary termination benefits would be recognized when communicated as part of its plan of termination to the affected employees when it no longer has the ability to withdraw an offer of those benefits. The implication of this would be that the communicated e-mail by Rump of a summary of the plan’s terms would have to be seen as binding in that Rump could no longer withdraw an offer of the benefits in order to recognize the benefits at the time of this e-mail communication.
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The Rump Organization. (2016, Feb 28). Retrieved from https://studymoose.com/the-rump-organization-essay