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(89)-PROVISIONS FOR RESTRUCTURING

Wednesday, January 27, 2010

Provisions for Restructuring

Financial reporting standards define a restructuring as a Program me that is planned and is controlled by management and materially changes either:
  • The scope of a business undertaken by an entity
  • The manner in which that business is conducted.


The financial reporting standards give the following examples of events that may fall under the definition of restructuring.

  • The sale or termination of a line of business
  • The closure of business location in a country or region or the relocation of business activities from one country region to another
  • Changes in management structure, for example, the elimination of a layer of management
  • Fundamental reorganizations that have a material effect on the nature and focus of the entity’s operations


The question is whether or not an entity has obligation, legal or constructive at the balance sheet date.

  • An entity must have a detailed formula plan for the restructuring.
  • It must have raised a valid expectation in those affected that it will carry out the restructuring by starting to implement that plan or announcing its main features to those affected by it.


Costs to be included within a restructuring prevision


The financial reporting standards state that a restructuring provision should include only the direct expenditures arising from the restructuring, which are those that are both:

  • Necessary entailed by the restructuring
  • Not associated with the ongoing activities of the entity.


The following costs should specifically not be included within a restructuring provision.

  • Restructuring or relocating continuing staff
  • Marketing
  • Investment in new systems and distribution networks

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