As the COVID-19 coronavirus continues to spread around the world, many companies need to adjust their operations and some may plan longer-term changes. Management may consider downsizing or discontinuing specific operations; conversely, some companies may plan to explore a new business opportunity. All of these may lead to a restructuring.
Management’s plans alone do not necessarily result in a restructuring provision in the financial statements. A restructuring provision is recognised only when specific conditions are met, and only for qualifying costs.
If an entity plans restructuring to respond to COVID-19, then it recognises a restructuring provision only when specific conditions are met.
IFRS® Standards provide specific guidance on when to recognise a restructuring provision and at what amount. A ‘restructuring’ is a programme planned and controlled by management that materially changes the scope of the business or the manner in which it is conducted. [IAS 37.10]
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a restructuring provision is recognised only when both of the following conditions are met:
For example, suppose a company decides to close down one of its production facilities as a result of COVID-19. If the company announces its plan, specifying the facility to be closed, the estimated timing of the closure and the approximate number of employees it plans to make redundant, then it recognises a restructuring provision. The approval of the restructuring plan by the company’s board is not by itself sufficient to recognise a restructuring provision. [IAS 37.75]
Termination benefits for employees made redundant as part of the restructuring are recognised in accordance with the specific requirements of IAS 19 Employee Benefits.
Under IAS 37, restructuring provisions include only direct costs arising from the restructuring – e.g. employee termination benefits and consulting fees that relate directly to the restructuring, onerous contract provisions, contract termination costs and expected costs from when operations cease until final disposal. [IAS 37.80]
Costs associated with ongoing activities are not included in restructuring provisions. For example, the costs of retaining or relocating employees, administration or marketing costs and investment in new systems are not recognised as part of a restructuring provision. [IAS 37.81]
Provisions are remeasured at each reporting date to reflect changes in the best estimate of the amount or timing of the outflows or changes in discount rates. [IAS 37.36, 59]
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