During normal times, companies will evaluate their cost structure and look for cost-saving measures to boost profits. During these unprecedented times, some companies (largely in the tech and crypto space) are cutting 10%-20% of their workforce. These workforce reductions have a real cost due to the termination benefits the companies must pay out. In addition to workforce reductions, other cost-cutting measures can also have accounting implications.  Companies are also focusing on conserving their cash flow by renegotiating their debt terms, selling businesses or assets, or putting projects on hold.

The following highlights the different cost-cutting and cash-conservation measures and their associated accounting implications:

Workforce Reductions

The main financial impact of workforce reductions relates to costs of severance and other termination benefits. The initial measurement and recognition for these costs depend on which guidance it falls under.

One-time termination benefits are accounted for under ASC 420, Exit or Disposal Cost Obligations.  A liability is recognized at the communication date unless the employees are required to render services to receive the termination benefits. If they are required to render services beyond the minimum retention period, the liability is initially measured on the communication date based on the fair value as of the termination date and recognized ratably over the service period.

Ongoing termination benefits under a plan or HR policy are accounted for under ASC 712, Compensation – Nonretirement Postemployment Benefits.

• Special termination benefits are recognized when the employee irrevocably agrees to voluntarily terminate, and the amount Is reasonably estimable.
• Contractual termination benefits are recognized when the obligation is probable and estimable.
• Other postemployment benefits are recognized when the obligation has been incurred, the the amount can be reasonably estimated, and the payment is probable. If the benefits vest or accumulate, the recognition depends on whether they are within the scope of ASC 710, Compensation.

See our article “Termination and Other Postemployment Benefits” for more detail on the accounting for these benefits.

Contract termination costs

Terminating a contract early can trigger an early termination penalty or require the company to continue making payments. Lease termination costs are accounted for under ASC 842, Leases. The right-of-use asset and lease liability should be derecognized, with a gain or loss recorded on termination of the lease. Other contract termination costs are accounted for under ASC 420. A liability and expense are recognized at fair value when the liability is incurred. See our article “Accounting for Exit and Disposal Costs” for more detail on the accounting for these costs.

Consolidate or close facilities

A decision to consolidate or close facilities can result in relocation, moving, security, or consulting costs. Costs associated with consolidating or closing facilities are accounted for under ASC 420. A liability and expense are recognized at fair value when the liability is incurred. See our article “Accounting for Exit and Disposal Costs” for more detail on the accounting for these costs.

Sale of business/assets

Management may decide to sell a business or long-lived assets to generate cash. The assets (group) should be evaluated to see if they meet the following criteria for being held-for-sale under ASC 360, Property, Plant, and Equipment at the reporting date:

• Management commits to a plan to sell the asset (group)
• The asset (group) is available for immediate sale in its present condition
• An active program has been initiated to locate a buyer
• The sale is probable and expected to be completed within one year
• The asset (group) is being actively marketed at a reasonable proxy of its fair value
• Significant changes to the plan are unlikely to occur

Long-lived assets held-for-sale are measured at the lower of their carrying amount or fair value less costs to sell, updated each reporting period, and broken out separately on the balance sheet. As a result, held-for-sale long-lived assets are not depreciated or amortized. 

The sale of a business also needs to be evaluated to see whether it meets the criteria for discontinued operations. If it is considered a discontinued operation, the company will need to follow the reporting requirements of ASC 205-20, Discontinued Operations.

The derecognition of the asset (group) is accounted for under ASC 610, Other Income. If the counterparty is a customer, the derecognition will be accounted for under ASC 606, Revenue from Contracts with Customers. If the asset (group) is considered a business, the derecognition of a subsidiary or business is accounted for under ASC 810, Consolidation. A gain or loss will be recognized on the date of sale.

Reorganization of business/management structure

As part of a restructuring, a company may decide to change or simplify its organization or management structure (e.g., eliminating a layer of management). The company’s reportable segments and goodwill reporting units need to be re-evaluated under ASC 280, Segment Reporting. The updated management reporting package and organization chart will need to be evaluated to determine whether the operating segments are different. See our article “Segment Reporting and Reporting Unit Analysis” for further detail on how to account for segments.

If the reportable segments change, the comparable period disclosures will need to be updated to conform to the current period presentation. A change in reporting units will impact the annual goodwill impairment test.

Disposal of a long-lived asset (abandonment)

If a company downsizes or decides to get out of a business, a company may end up abandoning the associated long-lived assets. If a long-lived asset is disposed of other than by sale (i.e., abandonment), it is accounted for under ASC 360. The asset will continue to be classified as held and used until abandonment. The abandonment date is when the asset ceases to be used. If the asset or facility is abandoned before its estimated useful life, the depreciation useful life should be shortened.

A disposal of a long-lived asset before the end of its useful life is an indicator of impairment. See our article “ASC 350 vs. ASC 360 Impairment” for more detail on the impairment model under ASC 360.

Facilities or assets that are temporarily idle should continue to be depreciated.

Renegotiate existing debt terms

In order to conserve cash, companies may renegotiate their existing debt to extend maturity date, increase revolver capacity, delay interest or principal payments, or get a debt covenant waiver. Any changes to the terms of an existing debt agreement should first be evaluated to see if it constitutes a troubled debt restructuring (i.e., the company is experiencing financial difficulties, and the lender grants a concession). If not a troubled debt restructuring, the changes should be accounted for under ASC 470-50, Debt- Modifications and Extinguishments.

If the terms of the new debt and the original debt are substantially different (discounted cash flows are >10% different), the original debt is effectively extinguished, and the new debt is recognized at fair value. If the terms are not substantially different, it is treated as a modification and accounted for prospectively. The accounting for existing and new lender fees and issuance costs depends on whether it is an extinguishment or modification.

Modifications of a revolving credit agreement are accounted for separately. The accounting for fees and issuance costs for a revolver modification depends on whether the borrowing capacity has increased or decreased.

For further detail on the accounting for the different types of debt modifications, see our article “Accounting for Debt Modifications.”

If a company violates its debt covenant as of the reporting date, then the debt should be classified as current on the balance sheet. If the debt covenant is violated after the balance sheet date, it should be classified as noncurrent with transparent disclosures. If the lender waives the debt covenant violation, the company should evaluate whether it will still meet the debt covenant violation in the future in determining the appropriate balance sheet classification.

Renegotiate lease terms

Similar to renegotiating existing debt terms, companies may try to renegotiate lease terms or receive rent concessions, which include short payments, rent abatement, rent deferral, or rent forgiveness. If the rent concessions were not originally contemplated in the original lease or if a lease is renegotiated and amended, the accounting should follow ASC 842 for lease modifications. Under lease modification accounting, if the lease modification is not considered a new lease but a continuation of the existing lease, the lease liability would be revalued as of the modification date. See our article “ASC 842 Overview” for further detail on lease modifications.

Putting an internal-use software project on hold

Sometimes companies assess which projects to prioritize and put other projects on hold, or they are evaluating whether a project still makes sense. In these cases, capitalized internal-use software (e.g., engineer salaries) needs to be evaluated to see if they are impaired under ASC 350-40, Internal-Use Software.

Interest capitalization should cease if the software is not impaired, and the software activities are only temporarily suspended.