Restructuring: definition and constructive obligation

Learning objectives

• Identify the events that may constitute a restructuring.L2
• Determine whether a constructive obligation to restructure exists at the end of the reporting period: a detailed formal plan, and a valid expectation raised by starting to implement it or by announcing its main features with sufficient specificity.L2, L3, L4
• Assess the effect of a decision not communicated by the end of the reporting period, of a later announcement (disclosure under IAS 10) and of a sale without a binding sale agreement.L3, L4

Normative references

• IAS 37 §70Examples of events that may fall under the definition of restructuring: sale or termination of a line of business; closure of business locations in a country or region, or relocation of business activities from one country or region to another; changes in management structure (eliminating a layer of management); fundamental reorganisations that have a material effect on the nature and focus of the entity's operations.
• IAS 37 §71A provision for restructuring costs is recognised only when the general recognition criteria in para. 14 are met; paras. 72 to 83 set out how they apply to restructurings.
• IAS 37A constructive obligation to restructure arises only when an entity (a) has a detailed formal plan identifying 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, the expenditures that will be undertaken and when the plan will be implemented, and (b) has raised a valid expectation in those affected that it will carry out the restructuring by starting to implement the plan or announcing its main features to them.
• IAS 37 §73Dismantling a plant, selling assets or publicly announcing the main features of the plan are evidence that implementation has started; a public announcement gives rise to a constructive obligation only if it is made in such a way and in sufficient detail as to give rise to valid expectations.
• IAS 37For a communicated plan to give rise to a constructive obligation, its implementation needs to be planned to begin as soon as possible and to be completed in a timeframe that makes significant changes to the plan unlikely; a long delay before the restructuring begins, or an unreasonably long duration, makes it unlikely that a valid expectation exists, because the entity still has the opportunity to change its plans.
• IAS 37A management or board decision to restructure taken before the end of the reporting period does not give rise to a constructive obligation at that date unless the entity has, before that date, started to implement the plan or announced its main features to those affected in a sufficiently specific manner. If these events occur after the reporting period, disclosure is required under IAS 10 if the restructuring is material and non-disclosure could influence users' decisions.
• IAS 37Although a management decision alone does not give rise to a constructive obligation, an obligation may result from other earlier events together with such a decision.
• IAS 37In some countries, the ultimate authority is vested in a board whose membership includes representatives of interests other than those of management (for example, employees), or notification to such representatives may be necessary before the decision is taken; a decision by such a board involving that communication may give rise to a constructive obligation to restructure.
• IAS 37No obligation arises for the sale of an operation until the entity is committed to the sale, i.e. until there is a binding sale agreement.
• IAS 37Even when the sale has been decided and publicly announced, the entity is not committed until a purchaser has been identified and a binding sale agreement concluded. When a sale is envisaged as part of a restructuring, the assets of the operation are reviewed for impairment under IAS 36; when a sale is only part of a restructuring, a constructive obligation can arise for the other parts of the restructuring before a binding sale agreement exists.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

19 questions

• Which of these projects of Aubrelle Logistique may constitute a restructuring as defined in IAS 37?L2
• The relocation of business activities from one country to another is among the events that may constitute a restructuring.L2
• Which definition corresponds to a restructuring under IAS 37?L2
• A restructuring provision is recognised only when the general recognition criteria for provisions are met.L2
• What are the two conditions for a constructive obligation to restructure?L2
• What must Belcorvane's detailed formal restructuring plan identify, at a minimum?L3
• A public announcement of the main features of a restructuring plan creates a constructive obligation only if it is made in such a way and in sufficient detail as to give rise to valid expectations.L2
• In November 20X5, the board of Casselane adopts a detailed plan to close its foundry unit (site, approximate headcount by function, costs, six-month timetable). In December, dismantling of the furnaces begins and equipment is sold. Is there a constructive obligation at 31 December 20X5?L3
• On 2 December 20X5, the regional bank Dauvrane approves a detailed plan to close 18 rural branches (list of branches, about 90 jobs by function, costs, timetable in the first half of 20X6). On 15 December, it gives the plan to the employee representatives and informs each customer concerned by letter of the closure dates. Is there a constructive obligation at 31 December 20X5?L3
• On 15 December 20X5, the board of Elbevane decides to close a plant; the detailed plan is announced to employees and customers only on 10 January 20X6, and nothing was started before the reporting date. The restructuring is material. What is the treatment at 31 December 20X5?L3
• On 30 December 20X5, the management of Fresnelle approves a plan to cut head office staff by 15%. The plan remains confidential until its announcement planned for March 20X6 and no measure has been started. The accountant recognises a restructuring provision of 1,100,000 at 31 December 20X5. What is the error?L3
• On 20 January 20X6, before the 20X5 financial statements were authorised, Gervalis announced the material closure of its packaging division, decided in January. It recognised no provision at 31 December 20X5, rightly, but its 20X5 notes say nothing about this restructuring. What is the error?L3
• No obligation arises for the sale of an operation until the entity is committed to the sale, that is, until there is a binding sale agreement.L3
• In October 20X5, Hautrivane publicly announces its decision to sell its gardening line of business. At 31 December, there are contacts with two potential buyers, but no agreement has been signed. The sale is the whole restructuring. What does Hautrivane conclude?L3
• Isinvale is restructuring its textile business: closure of two workshops (detailed plan announced to employees in November 20X5) and sale of a third workshop, for which no binding agreement has been signed at 31 December. What is the treatment at 31 December 20X5?L4
• In December 20X5, Jarvenne announces to employees a closure plan that will begin only in 20X8 and run over five years. What effect does this timetable have on whether a constructive obligation exists?L3
• Even if a management decision is not enough on its own to create a constructive obligation, an obligation may result from earlier events together with that decision.L3
• In a country where Kervellis's supervisory board includes employee representatives, that board approves on 12 December 20X5 a detailed plan to transfer production from two sites to a third, implemented from February to July 20X6. The plan is handed to the employee representatives on the same day; employees and customers will be informed only in January. Write a memo concluding on whether a constructive obligation exists at 31 December 20X5, distinguishing rule, data and judgement.L4
• At 31 December 20X5, Lancevane has decided (board meeting of 5 December) to close its Rennavel plant and to sell its land and buildings. No announcement was made before the reporting date; the plan is announced on 15 January 20X6. A buyer has signed a non-binding offer. The restructuring is material. Write a memo on the treatment at 31 December 20X5 (provision, assets, disclosure).L4