Cuddly Co., a domestic corporation, manufactures and sells stuffed animals. The Company’s manufacturing locations are primarily in the southeast. Its home office is located in Camelot, South Carolina. During October 2022, in light of changes in the demand for its products and increasing costs in the Southeast, Cuddly Co. management decided to relocate two of its manufacturing facilities to the Midwest, reduce personnel, and expand its stuffed rabbits with big pointy teeth production capabilities while eliminating its production of big cuddly teddy bears. As a result of this strategic shift, the company will close two production facilities in the Southeast and layoff a significant portion of its workforce. The Controller will present the plan to the Board of Directors for approval at its November 1 meeting. The company plans to notify all employees impacted by the decision regarding the details of the plan on December 1, 2022. Completion of the plan is expected to take approximately one year. Following are specific details of the exit plan.

Cuddly Co. has a December 31 year end. All amounts discussed below are considered material.

The rate of interest appropriate in the circumstances described is 10%.

The legal notification period applicable to Cuddly Co. is 120 days

Plan Components presented to the Board and approved on November 1, 2022

Salespeople

Twenty people who sell big cuddly teddy bears will be terminated no later than March 10, 2023. Prior to this date they will be paid their normal salary and related commissions (normal salary and commissions average $4,000 per salesperson per month). Each salesperson will receive an $8,000 severance payment when they leave the company regardless of the date. No salespeople left the firm prior to December 31, 2022. Because of the anticipated increased production and sales of stuffed rabbits with big pointy teeth, the Company plans to hire ten new salespeople by January 2023. Two new hires were made in December 2022 and due to the competitiveness in the market each new employee received a $10,000 signing bonus. Management expects that the additional new hires will also receive signing bonuses of $10,000 each.

Plant Managers

Stay Bonus - In order to insure an orderly closure of the plants, it is important that the managers over these operations continue to work for the company until the facilities are completely closed down. Accordingly, 15 managers have been offered a $9,000 bonus that they will receive on December 1, 2023, the expected plan completion date. If the managers leave prior to this date, they will receive no payment other than their normal salary of $4,000 per month up to the date they leave. It is probable that all but four managers will stay until December 1, 2023.

Relocation - The six managers with the best plant performance during the shutdown period will receive the $9,000 stay bonus discussed above and will be given the opportunity to relocate to the new facilities in the Midwest in December 2023. All six managers selected are expected to accept this opportunity. The company will pay the costs to relocate these employees to the Midwest and total costs are expected to be $180,000.

Production Employees

Six hundred production employees will ultimately be terminated due to the plan. Because it is important that the plants operate for a period of time, the employees have been offered a bonus for staying for a specified period. The 500 workers at Plant 1 will receive a $1,500 bonus if they remain until April 30, 2023 – the expected closure date of that facility.

The 100 workers at Plant 2 will receive a $4,000 bonus if they stay until December 1, 2023. The lease on Plant 2 will continue until December 1, 2025 and management is concerned that disgruntled employees will vandalize the abandoned plant during the years following the closure. Accordingly, management has decided that they will not pay the stay bonuses of the Plant 2 workers until December 1, 2025 and will only pay the bonuses if no vandalism occurs. It is expected that all employees will stay long enough to earn the bonus and that, in light of the bonus payment terms, Plant 2 will not be vandalized.

New Facilities

The cost to construct new facilities in the Midwest is expected to total approximately $6,000,000. This includes the purchase of additional production equipment. The new facilities are expected to be completed in November 2023.

Purchase contract termination

Due to the decreased production of big cuddly teddy bears, management intends to terminate a long-term purchase contract with its huggable teddy bear fur supplier. Under the contract, the Company is required to purchase a certain quantity of huggable teddy bear fur over the next 5 years. The Company will be able to terminate the contract in accordance with an early termination clause in the contract. There is a $60,000 penalty for early termination and the supplier requires written notification of early termination. Management intends to give written notice to the supplier regarding the plans to terminate the agreement and pay the $60,000 penalty on February 1, 2023.

Plant closure costs

Various costs will be incurred related to the closure of Plant 1, including costs to remove fully depreciated equipment that is not saleable, to clean-up the building and to de-identify it (i.e. removing all signage related to Cuddly Co). These costs are expected to total $100,000 and the work is expected to be performed immediately subsequent to the plant closure.

NOTE – both plants are leased. The impact of the terminations of these leases is being ignored in this assignment due to the complexity of addressing the impact of lease termination.

D) determine the total amount of restructuring expense and exit or disposal obligation/liability that should be reflected in the current (2022) and future financial statements. Provide detailed support for these amounts.

E) Prepare the footnote disclosures for the exit activity, making sure to follow the disclosure guidance in the ASC. Using the Disclosure section of the ASC as a checklist is a good way to ensure that you include all required disclosures. The footnote of your selected company from part 1. above may be a useful example for your footnote. Keep in mind, however, that because immaterial items are not required to be disclosed, you cannot assume these footnotes are perfect examples for our scenario where all items are considered material. Note that footnotes use tables when feasible, do not cite standards, do not include journal entries, and are relatively brief – while meeting the standard requirements. Provide detailed support for all amounts included in the footnote. This support should make it clear where and how all amounts calculated in Part C are included (if applicable) in the footnotes and financial statements. This support should not be included in the footnote but is instead provided as separate supporting schedules (sometimes referred to as footnote tracks)

 

The rate of interest appropriate in the circumstances described is 10%.

 

The legal notification period applicable to Cuddly Co. is 120 days

 

Plan Components presented to the Board and approved on November 1, 2022

 

Salespeople 

 

Twenty people who sell big cuddly teddy bears will be terminated no later than March 10, 2023.  Prior to this date they will be paid their normal salary and related commissions (normal salary and commissions average $4,000 per salesperson per month). Each salesperson will receive an $8,000 severance payment when they leave the company regardless of the date. No salespeople left the firm prior to December 31, 2022. Because of the anticipated increased production and sales of stuffed rabbits with big pointy teeth, the Company plans to hire ten new salespeople by January 2023.  Two new hires were made in December 2022 and due to the competitiveness in the market each new employee received a $10,000 signing bonus.  Management expects that the additional new hires will also receive signing bonuses of $10,000 each.

 

Plant Managers 

 Stay Bonus - In order to insure an orderly closure of the plants, it is important that the managers over these operations continue to work for the company until the facilities are completely closed down. Accordingly, 15 managers have been offered a $9,000 bonus that they will receive on December 1, 2023, the expected plan completion date. If the managers leave prior to this date, they will receive no payment other than their normal salary of $4,000 per month up to the date they leave. It is probable that all but four managers will stay until December 1, 2023.  

 

Relocation - The six managers with the best plant performance during the shutdown period will receive the $9,000 stay bonus discussed above and will be given the opportunity to relocate to the new facilities in the Midwest in December 2023.  All six managers selected are expected to accept this opportunity.  The company will pay the costs to relocate these employees to the Midwest and total costs are expected to be $180,000.

 Production Employees

 

Six hundred production employees will ultimately be terminated due to the plan. Because it is important that the plants operate for a period of time, the employees have been offered a bonus for staying for a specified period. The 500 workers at Plant 1 will receive a $1,500 bonus if they remain until April 30, 2023 – the expected closure date of that facility. 

 The 100 workers at Plant 2 will receive a $4,000 bonus if they stay until December 1, 2023. The lease on Plant 2 will continue until December 1, 2025 and management is concerned that disgruntled employees will vandalize the abandoned plant during the years following the closure.  Accordingly, management has decided that they will not pay the stay bonuses of the Plant 2 workers until December 1, 2025 and will only pay the bonuses if no vandalism occurs. It is expected that all employees will stay long enough to earn the bonus and that, in light of the bonus payment terms, Plant 2 will not be vandalized.

 

New Facilities

 

The cost to construct new facilities in the Midwest is expected to total approximately $6,000,000. This includes the purchase of additional production equipment. The new facilities are expected to be completed in November 2023.

 

 

Purchase contract termination

 Due to the decreased production of big cuddly teddy bears, management intends to terminate a long-term purchase contract with its huggable teddy bear fur supplier.  Under the contract, the Company is required to purchase a certain quantity of huggable teddy bear fur over the next 5 years.  The Company will be able to terminate the contract in accordance with an early termination clause in the contract. There is a $60,000 penalty for early termination and the supplier requires written notification of early termination.  Management intends to give written notice to the supplier regarding the plans to terminate the agreement and pay the $60,000 penalty on February 1, 2023.  

  Plant closure costs

 Various costs will be incurred related to the closure of Plant 1, including costs to remove fully depreciated equipment that is not saleable, to clean-up the building and to de-identify it (i.e. removing all signage related to Cuddly Co). These costs are expected to total $100,000 and the work is expected to be performed immediately subsequent to the plant closure.  

 

NOTE – both plants are leased.   The impact of the terminations of these leases is being ignored in this assignment due to the complexity of addressing the impact of lease termination

QUESTIONS: 

A) Determine if the plan described represents a restructuring as defined in the FASB Accounting Standards Codification (ASC).  Briefly explain the basis for your conclusion and provide appropriate references. If you do not recall how to properly reference the ASC, refer to the guidance on pages 15 and 16 in the “About the Codification” document posted under “Help” at the FASB ASC site.

B) Determine the communication date relative to employee termination benefits. Explain your reasoning and provide an appropriate reference in support of your determination.

C) Determine the appropriate treatment for each component of the plan (whether the component/action is determined to be a restructuring cost or not). Be specific regarding the accounts, related amounts, periods affected and disclosure requirements. Terminology matters.  Do not, for example, use the word “cost” when you mean “expense”.  “Cost” is an inexact term and can mean many things whereas “expense” is a defined term in accounting.  Be careful how you use the terms “expense” and “liability” – at a point in time, an amount can be one, both or neither.  Similarly, keep in mind that disclosure does not necessarily mean recording.  Amounts can be required to be disclosed without requiring recording in the current (or future) period. Explain the reason for your treatment of each component of the plan.  For each expenditure that qualifies as a restructuring cost provide appropriate ASC references to support your approach and provide detailed support for all calculations (this may be in excel or manually prepared). For items that are not determined to be restructuring costs, you do need to briefly explain the proper treatment; however, you do not need to provide an ASC reference for this treatment.

 

D) Based on your conclusions from C. above, determine the total amount of restructuring expense and exit or disposal obligation/liability that should be reflected in the current (2022) and future financial statements.  Provide detailed support for these amounts.

D) Prepare the footnote disclosures for the exit activity, making sure to follow the disclosure guidance in the ASC. Using the Disclosure section of the ASC as a checklist is a good way to ensure that you include all required disclosures. The footnote of your selected company from part 1. above may be a useful example for your footnote.  Keep in mind, however, that because immaterial items are not required to be disclosed, you cannot assume these footnotes are perfect examples for our scenario where all items are considered material. Note that footnotes use tables when feasible, do not cite standards, do not include journal entries, and are relatively brief – while meeting the standard requirements.  Provide detailed support for all amounts included in the footnote.  This support should make it clear where and how all amounts calculated in Part C are included (if applicable) in the footnotes and financial statements. This support should not be included in the footnote but is instead provided as separate supporting schedules (sometimes referred to as footnote tracks).