Financial Accounting: An Integrated Statements Approach, 2nd Edition

right to work for 60 days but may elect to leave the firm earlier. That is, employees

may be paid severance at the end of 60 days or at any time in between. The expense

and liability to provide employee benefits should be recognized at its fair value on the

plan communication date.^4 The fair value of this plan would be $1,000,000 (200 

$5,000), which is the aggregate expected cost of terminating the employees. Thus, the

$1,000,000 restructuring charge would be recorded as follows:

The restructuring charge is reported as a separate expense deducted from gross

profit in determining income from continuing operations, as shown in Exhibit 1. The em-

ployee termination obligation would be shown as a current liability. If the plan called

for expected severance payments beyond one year, then a long-term liability would be

recognized. In addition, a note should disclose the nature and cause of the restructur-

ing event and the costs associated with the type of restructuring event.

The actual benefits paid to terminated employees should be debited to the liabil-

ity as employees leave the firm. For example, assume that 25 employees find other em-

ployment and leave the company on March 25. The entry to record the severance

payment to these employees would be as follows:

Unusual Items Reported Below Income

from Continuing Operations

Some unusual items are deducted from income from continuing operations in arriving at

net income. These unusual items consist of discontinued operations, extraordinary

items, and changes in accounting principles.

540 Chapter 12 Special Income and Investment Reporting Issues

4 For longer-term severance agreements, present value concepts may be required to determine fair value.

We will assume short-term agreements where the time value of money is assumed to be immaterial.

Present value concepts are discussed in Chapter 10.

Mar. 1 Restructuring Charge 1,000,000

Employee Termination Obligation 1,000,000

Mar. 25 Employee Termination Obligation 125,000

Cash 125,000

Ethics in Action

TheeBay Inc.community is noted for the following principles:

• We believe people are basically good.


• We believe everyone has something to contribute.


• We believe that an honest, open environment can bring
  out the best in people.


• We recognize and respect everyone as a unique
  individual.


• We encourage you to treat others the way you want to
  be treated.

Unfortunately, there are a few bad apples in every barrel, and

eBay is not without its share. As a result of increasing fraud,

eBay has introduced feedback, escrow services, buyer pro-

tection plans, a warranty program, and over 800 “fraud-

busters.” Even so, online fraud escalates as eBay’s popularity

grows.

Source:http://www.ebay.com

INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS

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