The term special termination benefits refers to compensation offered to employees if they voluntarily sever their employment with the company. Termination benefits are typically classified as contractual, one-time, special and other postemployment.
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.
Special termination benefits are those offered to employees for a short period of time to encourage the employee to voluntarily retire or otherwise sever their employment with the company. Unlike a one-time benefit, which is offered to employees that are involuntarily terminated, special benefits are offered by companies to volunteers.
FASB Accounting Standards Codification Topic 450, Contingencies (specifically, 450-20 Loss Contingencies) provides companies with guidance on this topic. This standard states a company should accrue to income the cost associated with special termination benefits at the time the employee accepts the offer and the employer can reasonably estimate the amount to be paid. The standard specifically states the benefit should not be accrued based on an estimated rate of acceptance.
The standard also suggests the company should disclose in its financial statements the quantitative information about the loss, including its nature, the magnitude, and timing.
Following a benchmarking study, the management team at Company A has come to the conclusion that its labor costs are 10% higher than the industry average. In order to lower the number of employees, Company A is offering five years of service and will lower their normal retirement age to 55 for the next six month. Company A's management team believes 8% of their workforce will take advantage of this offer, and voluntarily retire from the company.
This offer is considered a special termination benefit. As such, Company A is required to accrue the expense associated with this program as employees choose to retire and the value of this benefit is quantified.
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