Restructuring Cost

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Case 10-3 Restructuring Costs Pharma Co. is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. Pharma Co. is in the process of restructuring a business line. As part of the restructuring, Pharma Co. is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area. The relocation plan would include terminating certain employees. IAS 37 includes guidance for accounting for restructuring costs in accordance with IFRSs. Paragraph 10 of IAS 37 defines restructuring as follows: [A] programme that is planned and controlled by management, and materially changes either: a. the scope of a business undertaken by an entity; or b. the manner in which that business is conducted. Under IFRSs, emphasis is placed on the recognition of the costs of the exit plan as a whole, whereas under ASC 420-10 (Statement 146) in U.S. GAAP, each type of cost should be examined individually to determine when it should be accrued. As a result, there may be differences in timing of recognition of restructuring costs under IFRSs and U.S. GAAP. Pharma Co. has taken the following actions: 1. On December 15, 2008, Pharma Co. issued a press release announcing its intentions to terminate the lease of the old facility. The press release is included as Appendix A. Assume the terms of the lease are such that Pharma Co. accounts for the lease as an operating lease. Further, the lease agreement stipulates that written notice is required for early termination. 2. On December 27, 2008, Pharma Co. management communicated the main features of a one-time, nonvoluntary termination plan to its employees. The communication to the employees is included as Appendix B. 3. Pharma Co. will incur a relocation cost of…...

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