Summary of Statement No. 146

Accounting for Costs Associated with Exit or Disposal Activities(Issued 6/02)

Summary

This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)."

Reasons for Issuing This Statement

The Board decided to address the accounting and reporting for costs associated with exit or disposal activities because entities increasingly are engaging in exit and disposal activities and certain costs associated with those activities were recognized as liabilities at a plan (commitment) date under Issue 94-3 that did not meet the definition of a liability in FASB Concepts Statement No. 6, Elements of Financial Statements.

Differences between This Statement and Issue 94-3

The principal difference between this Statement and Issue 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by the Board in this Statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, this Statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability.

How the Changes in This Statement Improve Financial Reporting

This Statement improves financial reporting by requiring that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The accounting for similar events and circumstances will be the same, thereby improving the comparability and representational faithfulness of reported financial information.

How the Conclusions in This Statement Relate to the Conceptual Framework

This Statement specifies that a liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability in Concepts Statement 6 is met.

This Statement affirms the Board’s view that a fair value measurement is the most relevant and faithful representation of the underlying economics of a transaction. As discussed in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, fair value is the objective for initial measurements that are developed using present value techniques.

This Statement considers the qualitative characteristics discussed in FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, specifically, that providing comparable financial information enables investors, creditors, and other users of financial statements to identify similarities in and differences between two sets of economic events. Ultimately, that financial information facilitates their investment, credit, and other resource allocation decisions and contributes to the efficient functioning of the capital markets.

The Effective Date of This Statement

The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged.