Surfing the Standards Case 2: Severance Pay for Factory Workers The managers of Axbo Company, a private company whose bank requires it to follow U. S. GAAP, have decided to close one of its factories. The managers made this decision on July 16 of the current year and communicated this plan to their workers on August 1. All 200 workers will receive $ 1,250 per month for 12 months if they stay at work until the factory closes on March 1 of the following year. The first of these payments will occur one month after the factory closes. The managers estimate that 90% of the workers will remain long enough to receive their severance pay. The workers will receive no additional severance benefits of any kind beyond the severance pay. Axbo uses a 6% discount rate when computing fair values. The factory closing will not qualify as a discontinued operation and it is highly unlikely that any changes will be made to the plan. Also, Axbo management has the authority to approve this plan, without board approval.
The management of Axbo is unsure how to account for the severance pay, including the impact on the financial statements and when it will show up on the financial statements. They are not concerned with required disclosures. Prepare a memo to the file using the Codification for support.