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Cases on Recognition Measurement
The Early Retirement Incentives Case
"A lean and mean event"
To trim its operating expenses, Lean and Mean Company decided to
reduce its staffing levels by 100 by offering early retirement
incentives to selected employees. However, having observed similar
programs of other companies that proved to be very costly and
resulted in excessive staff reductions, the company was
apprehensive about making an offer that would be too
attractive.
Accordingly, the company settled on a "dutch auction" strategy of
initially offering only limited incentives that had virtually no
chance of attracting more than 100 employees. Management decided
that if the initial offering fails to attract the requisite number
of employees, it will design a subsequent offering that is slightly
enhanced, and so on until the targeted number of employees is
reached.
The company made the initial offer just before the company's
year-end, stipulating that the offer is limited to the first 100
employees accepting it and that it would expire in 30 days. The
offer provides for a one-time payment of $10,000 to employees
having 10 or more years of service in exchange for their voluntary
retirement. As of year-end (December 31), no employees have
accepted the offer. Management believes that the odds are equal
that 1, 2, . . . 99, or 100 employees will accept the offer.
* * * *
- Should Lean and Mean recognize a liability for its offer of
retirement incentives in its year-end financial statements? If so,
what is the amount of that liability?
- If, instead of making the offer to 100 employees, Lean and Mean
made the offer to only one employee and believes that the odds of
acceptance or rejection are equal, should Lean and Mean recognize a
liability for that offer? If so, what is the amount of that
liability?
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