Accounting for redundancies under FRS 102

This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members and Financial Reporting Faculty members, understand the accounting considerations and requirements for redundancy payments under FRS 102.

Termination benefits are defined in the glossary of FRS 102 as:

Employee benefits provided in exchange for the termination of an employee’s employment as a result of either:

(a) An entity’s decision to terminate an employee’s employment before the normal retirement date; or
(b) An employee’s decision to accept voluntary redundancy in exchange for those benefits.

Redundancy payments are therefore included within this definition and are accounted for in accordance with Section 28 of FRS 102 (paragraphs 28.31 to 28.37 and 28.43 to 28.44).

Paragraph 28.32 of FRS 102 explains that because termination benefits do not provide an entity with future economic benefits, an entity shall recognise an expense in profit or loss immediately.

Careful consideration must be given to the timing of this recognition though. Paragraph 28.34 states:

An entity shall recognise termination benefits as a liability and an expense only when the entity is demonstrably committed either:

(a) To terminate the employment of an employee or group of employees before the normal retirement date; or
(b) To provide termination benefits as a result of an offer made in order to encourage voluntary redundancy.

An entity is only demonstrably committed to a termination when:

• It has a detailed formal plan for the termination; and
• Is without realistic possibility of withdrawal from the plan.

If an entity is not demonstrably committed to a termination, it must not recognise a redundancy provision or the related expense.

Where an entity is making redundancy plans close to its balance sheet date, the position at the balance sheet date must be carefully assessed to determine whether the conditions are met or not at that time. For a redundancy provision to be recognised in the accounts, there must either be a legal or constructive obligation existing at the balance sheet date.

Detailed formal plan

A ‘detailed formal plan’ is not specifically defined in FRS 102, however a footnote to paragraph 28.35 highlights the features of a detailed formal plan for restructuring, which may include termination benefits, is given in paragraph 21.11C. A detailed formal plan must therefore identify at least:

• The business or part of a business concerned;
• The principal locations affected;
• The location, function, and approximate number of employees who will be compensated for terminating their services;
• The expenditures that will be undertaken; and
• When the plan will be implemented.

When considering whether a redundancy plan is sufficiently detailed, the plan would not have to detail the individual employees who will be made redundant, but it should contain enough detail such that those employees in the specific employee group affected have a valid expectation that they (or their colleagues) will be impacted.

Without realistic possibility of withdrawal

‘Without realistic possibility of withdrawal’ is also not specifically defined in FRS 102.

If, for example, at the balance sheet date, management has only made an internal decision in a board meeting to make redundancies, a liability should not be recognised as those affected have not been informed and management could change their plans in the following period. If management then went on announce their decision to the affected employees after the balance sheet date, but before the accounts are approved for issue, this is a non-adjusting event after the reporting period (post balance sheet event) and, in accordance with Section 32 of FRS 102, would generally require disclosure.

The public announcement of a redundancy plan will only give rise to a liability if it is made in sufficient detail and in such a way that it raises a valid expectation in those affected by it and management could not realistically withdraw from the plan. If, for example, management announced publicly that they intend to make some redundancies but they need to conduct further analysis before deciding which group of employees will be made redundant, this will not give rise to a provision at the balance sheet date as the plan has not raised a valid expectation in those employees affected.

Measurement

FRS 102 paragraph 28.36 requires an entity to measure termination benefits at the best estimate of the expenditure that would be required to settle the obligation at the reporting date. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits shall be based on the number of employees expected to accept the offer.

Termination benefits due more than 12 months after the end of the reporting period, shall be measured at their discounted present value using the methodology for selecting a discount rate specified in paragraph 28.17 (FRS 102 paragraph 28.37).

FRS 102 paragraph 28.36 requires an entity to measure termination benefits at the best estimate of the expenditure that would be required to settle the obligation at the reporting date. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits shall be based on the number of employees expected to accept the offer.

Termination benefits due more than 12 months after the end of the reporting period, shall be measured at their discounted present value using the methodology for selecting a discount rate specified in paragraph 28.17 (FRS 102 paragraph 28.37).

FRS 102 paragraphs 28.43 to 28.44 require the following disclosures:

• For each category of termination benefits that an entity provides to its employees;
  - The nature of the benefit;
  - Its accounting policy; and
  - The amount of its obligation and the extent of funding at the reporting date.
• Where there is uncertainty about the number of employees who will accept an offer of termination benefits, disclosure of the contingent liability in accordance with Section 21 of FRS 102, unless the possibility of outflow is remote.

An entity with a year end of 30 April 2020 plans to restructure its operations and make 50 members of staff redundant in the process.

A detailed formal plan is approved and subsequently communicated to affected employees on 6 April 2020 along with an offer of £6,000 to each employee who accepts voluntary redundancy, provided they accept the offer by 29 May 2020.

If fewer than 50 relevant employees accept the offer, other employees will be made redundant to reach the target. These employees would only be entitled to £5,000 each.

At 30 April 2020, 35 employees have accepted the offer of voluntary redundancy. The liability (and related expense) to be recognised at 30 April 2020 is as follows:

In addition disclosure should be made of a contingent liability of £15,000 (the additional amount payable if the maximum number of employees accepted voluntary redundancy).

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.