FASB Issues FAS 146, Ending Six-Year Project

Yesterday, the Financial Accounting Standards Board (FASB) issued [1] Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The statement has been six years in the making. It arrives at the tail end of an economic downturn that has forced many companies to make difficult decisions of the type addressed by the standard. Earlier in the week, FASB also announced [2] it would soon address the implications of decisions involving employee stock options.

The new standard covers [3] a wide range of exit and disposal activities:

• Exit activities include restructurings planned and controlled by management that materially change the scope of the business undertaken by an enterprise or the manner in which that business is conducted. Examples include the sale or termination of a line of business, the closure of business activities in a particular location or relocation of business activities from one location to another, and changes in management structure.

• Costs associated with disposal activities include costs of terminating a contract that is not a capital lease, costs of consolidating facilities or relocating employees, and some types of termination benefits provided to employees.

"The principal effect of applying Statement 146 will be on the timing of recognition of costs," explained FASB Project Manager Linda MacDonald. "In many cases, those costs [costs associated with exit and disposal activities] will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment."

FAS 146 will be effective for exit or disposal activities initiated after December 31, 2002. It completes the second phase of a project begun in August 1996. The first phase led to issuance of FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in August 2001. Copies of the statements may be ordered from FASB's Web site [4] or by telephoning FASB's Order Department at 800-748-0649.

-Rosemary Schlank