 Hello and welcome to the session in which we will discuss accounting for liabilities that result from exit and Disposal closure activities now This is a real story my wife works for Johnson and Johnson and she started to work for them If my memory serves me right in year 2013 and the first three years from 2013 to 2016 I still remember Every five to six months my wife would come home and she would say well The company is going through another reorganization a downsize change in management structure You know something is going on and every time this happens. Well People will get laid off and as a result you have to pay people or you have to Reallocate people to other divisions or transfer them give them options to transfer for example My wife work in Pennsylvania Maybe she what she would be offered a job and Boston if she would like to and the company will pay her expenses now back then luckily My wife survived all these reorganization downsizing change in management structure and she up till up till now Which is 2022 and f 2022 she still work for J&J But the point is this happens a lot in companies now What cost are we dealing with that we have to account for as a result of this disposal closure activities? Well first off first of all what they're gonna lay off employees and as a result They're gonna have a severance pay believe it or not back then I was I was thinking well. Yes. Why not, you know lay off You know if my wife get laid off she might get two three six month salary all at once It all depends on how long you've been there But you have to pay the employees severance pay you have to as I told you you might have to Relocate the employees and that's an additional cost for example if someone is working in Philadelphia You'll give them the option to move to California But as a result you have to pay for their expenses selling their homes buying a home in California Transportation so on and so forth. That's an additional cost Sometime what happened is not some time on you close you might have lease with the landlord Well, guess what you're gonna have to break the lease and as a result You might have to pay a penalty and when that happens you have to expense it So all these are costs that you have to record in this period because the lease no longer provide any future benefit You might have to combine branches just when you close a branch if it's if it's being rented you might have to break the rent You have to break the lease. There's a fee simply put any cost of closure all these costs Will be treated as part of the disposal closure activities and will be part of what part of the laia Bellaty before we proceed any further. 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Well at some point the company is deciding and you know in the background the employees don't know that this is this is Ungoing well the decision to close does not amount to recording a liability The company will have to announce it publicly and usually before they announce this publicly usually what they do in The real world they speak to employees who are affected Then they call for a town meeting and they will tell everyone they will announcement but usually they speak to the employees and Again, my wife would say I'm we're going to another Town hall meeting another town hall meeting but usually the employees affected out say are you gonna be laid off? I'd say no because people who are affected They already they already talked to them. So that's what happened So when do recognize the liability? Well any liability will be recorded when the event actually occurred So when does the event occur under those? Circumstances is when the company announced it because once they announcement that once they announce it They have a liability because as I said they speak to the employees They they told the employees were laying you off and they tell them as a result You might get some sort of a severance package So when when that happened a present obligation to pay in the future is created basically it sounds like a liability This is when we record the liability and there is no way out of this liability once you announce it once you tell the employee This is gonna happen. You can cancel that liability anymore. Simply put it sounds like a liability So once it's needs those those three points. It's a liability now Sometime what happened we might incur future operating losses from the closure of this operation Those are recognized in period incurred because that could happen Well, we'll record them in future periods now how much to record how much to record? Well, we're gonna have to determine the fair value of the liability How do we determine the fair value of the liability? We have future cash flow expected to be dispersed. We discount them This is how we Figure out the liability now this could change this could change Why maybe one of the employees or several employees? They may renegotiate with the company. They want a larger package The fee was larger than what we thought what we estimated originally for breaking the lease. That's fine We treat those changes Prospectively just like any change now were to report this information on the income statement on the income statement Generally speaking, you would report this as loss from continuing operation companies lay off people all the time Do reorganization downsize so on and so forth Unless unless we are dealing with a discontinued operation So we are closing down an operation and it's considered a strategic shift. That's totally different Then it will be part of discontinued operation which is covered in totally separate lecture Now what else do we have to do? We have to disclose the company will have to tell the investors What's going on? So you'll have to in the annual report you have to put the description of the exit Activity basically talk about the benefit the circumstances Why did you undergo this and usually it's for cost saving to better manage the company? Blah blah blah all that stuff Then you have to break down the cost of major activities For this period as well as the cumulative amount of future period You have to tell us how much you're incurring this cost of this period and future period You also have to reconcile the liability Simply put you're going to have a beginning liability An ending liability in some place in between you might have to pay off the liability Just show us how much the estimated original liability was how much you paid off and what's the ending liability What's left to pay? And sometime you cannot properly estimate the cost for certain activities the vision branches then disclose this information Now when it comes to disclosure, I always tell students Especially if you're studying for the CPA exam choose your favorite large Corporation and check their annual report like if you look up Pfizer or Johnson and Johnson these large companies They always go through some sort of a reorganization or downsizing Look at their disclosure and see what they talk about and you'll have a good idea About what they're talking about but this is basically what you need to know about This liability which is accounting for liabilities that deals with exit disposal or Closure activities again in the real world. We call it downsizing reorganization Or some sort of a fancy name that's provided by a consultant Actually, yes, my wife did survive those Those reorganization and matter of fact two of her supervisors Were let were let off and she wasn't I mean at some point I was hoping she would get laid off, but she did not she need she needs a break Ha ha. All right, everyone. Stay safe and study hard