One-Time Termination Benefits

Definition

The term one-time termination benefits refers to compensation provided to employees that are involuntarily separated from the company.  One-time termination benefits apply when there is a specific termination event; alternatively, they can apply for a specified future period.  Termination benefits are typically classified as contractual, one-time, special and other postemployment.

Explanation

Under certain operating conditions, a company may institute programs aimed at encouraging employees to voluntarily terminate employment.  Alternatively, a company may deem it necessary to involuntarily sever its employment relationship with a group of individuals.  When this occurs, the company may provide early termination benefits to those affected individuals.

One-time termination benefits are provided to employees that are involuntarily terminated.  Accounting guidance for companies is offered in FASB Accounting Standards Codification Topic 420 - Exit or Disposal Cost Obligations.  The standard applies to those affected employees that are not provided benefits under an ongoing arrangement (contractual benefit), and enhancements to an ongoing benefit would not apply in the future.  In addition, employers cannot offer the affected employee voluntary termination benefits.

For example, a company may decide to offer employees affected by a layoff severance pay, even though the company does not have a documented plan that provides for this benefit.  In addition to direct compensation, a one-time termination program can include non-monetary benefits such as retraining, and outplacement services.

Once the conditions outlined in FASB ASC 420 have been satisfied, the following guidance is provided for recording the cost of this benefit:

  • If future services of the affected employees are not required, the company should recognize the cost of the benefit in the current accounting period.
  • If future services of the affected employees are required, the company should recognize the cost of this benefit over the required service period.

Example

Company A has decided to close one of their manufacturing plants and this will result in the involuntary termination of 100 employees.  Company A does not have a documented program that provides for any benefit to terminated employees, but has decided to offer the affected individuals a one-time termination benefit.  To receive this benefit, the employee must agree to work for the company until the plant is closed 12 months from now.

Since Company A requires future services of the affected employees, FASB ASC 420 requires the company to accrue this cost obligation over the next 12 months.

Related Terms

termination benefits, contractual termination benefits, special termination benefit, constructive discharge, Loudermill Rights, partial unemployment benefits, pink slip, termination for cause