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.


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  1. 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?
  2. 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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