Financial Accounting Manual
- Revision Set 53
- Chapter 1. Balance Sheet
- Chapter 2. Collateral and Custodies
- Chapter 3. Property and Equipment
- Chapter 4. Central Bank Unique Accounting
- Chapter 5. Federal Reserve Notes
- Chapter 6. Reporting Requirements
- Chapter 8. Special Topics
Appendix E. Restructuring
E.1 FRB Accounting for Costs Associated with Restructuring
In this Section:
Below are accounting instructions related to restructuring costs. The bottom-line effect is that the costs associated with employee separation pay that follow the framework approved by the Conference of Presidents in preparation for the check restructuring decision will be recognized entirely in 2003.22
The purpose of this document is to address the financial accounting ramifications of the various restructuring activities underway at the Reserve Banks in 2003 and 2004. These instructions are interpretations of the Financial Accounting Manual for Federal Reserve Banks (FAM). In most cases these instructions represent a more detailed description of the FAM or an interpretation regarding transactions that were not explicitly covered by FAM. Reserve Banks should base their requests to recognize losses due to impairment or contingencies on the information in this document.
- Restructuring cost will occur during 2003 - 2004.
- Given current interest rates and the relatively short time period, the difference between present value calculations and the nominal value will be immaterial. Therefore, in order to minimize complexity, cost, and opportunity for error, nominal values will be used for estimates of cash flows less than or equal to five years.
- Severance benefits granted to terminated employees will follow the general parameters discussed by the Conference of Presidents (COP): 1/2 month/year of service up to one year except for those age 55 with at least 75 points (age plus years of service). Employees terminated who meet the 55/75 test will receive an enhanced pension benefit the cost of which will reduce their severance payment by up to 100 percent.23
The Federal Reserve Banks have adopted an enhanced retirement plan (ERP) benefit for employees involuntarily terminated during 2003 - 2004 whose positions will be eliminated who are age 55 or older with at least 75 points (age plus years of service). Those who qualify for the ERP will have five points added to their retirement calculation. Reserve Banks have modified their basic severance packages in order to reduce the amount of any severance paid to an employee that will receive the ERP by an amount equal to the cost of the ERP to the retirement plan up to 100 percent. Reserve Banks have generally committed to providing similar severance benefits to those involuntarily separated (and not eligible for the ERP) of 1/2 month salary/year of service up to one year salary. The 1/2 month salary/year is typical of what FRBs offered prior to the check restructuring initiative and within the System's guidelines. Some FRBs may provide additional one-time benefits to younger employees in order to retain them until termination date.
Employee Termination Benefits
The termination benefit provisions below have been modified from earlier discussions based on advice from PwC, our external auditors. They suggested that FASB ASC Topic 712-10; SFAS No. 112 was more applicable to our severance/termination benefit situation than either FASB ASC Topic 420-10; formerly SFAS No. 146 or FASB ASC Topic 712-10; formerly SFAS No. 88. FASB ASC Topic 712-10; formerly SFAS No. 112 essentially defines whether payments should be accrued over the benefiting period under FASB ASC Topic 710-10; formerly SFAS No. 43 or recognized in total when it is probable and estimable in accordance with FASB ASC Topic 450-20; formerly SFAS No. 5. PwC's advice was influenced by the fact that the Reserve Banks have a generally understood practice of providing separation payments to employees based on years of service and employees have a general understanding that they will be provided with a severance benefit if they are terminated as part of a general downsizing. As a result, they viewed the separation payments to be payments in accordance with a standard post-employment benefit rather than a program solely limited to a particular event. PwC was also influenced by the "accumulation" nature of the benefit. That is, the amount of the payment increases based on years of service. Such a design is consistent with the FASB ASC Topic 710-10; formerly SFAS No. 43 concept that the payment is more related to past service rather than future service (as contemplated by FASB ASC Topic.420-10; formerly SFAS No. 146). Although these benefits do not vest, SFAS 43 (c.710-10) does allow for the accrual of nonvesting benefits when payment of that benefit is probable.
Involuntary Termination Benefits
The cost of providing termination benefits to employees involuntarily terminated should be recognized when it is probable that the liability has been incurred and the amount is estimable. The cost of providing additional incentive benefits to employees beyond the standard benefit program to retain staff that might otherwise forfeit their benefit should not be included in this accrual (see retention benefits below). Reductions to the standard benefit program associated with the ERP should be included. The probability test has been met when the all four of the following tests have been met and communicated to the affected employees (communication date):
- Management with the appropriate authority has committed to the termination plan.
- The plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date.
- The terms of the benefits to be provided to terminated employees have been established in sufficient detail to enable employees to determined the type and amount of benefits they will receive if they are terminated.
- Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
Technically, the incremental cost associated with employees who add a year of service (1/2 month additional severance) between the communication date and the termination date should be recognized ratably over the period between the communication date and the service date rather than on the communication date. Given that the termination dates contemplated by this document end are no later than 2004 the timing difference between 2003 and 2004 that would be created by accruing the entire expected cost without regard to service date is immaterial.
Incremental additional termination benefits provided to employees as a retention incentive should be accrued evenly over the period from the communication date to the termination date. The general program discussed by the COP did not include any of these benefits but recognized that some Reserve Banks may determine that such supplemental features are warranted in certain situations.
Voluntary Termination Benefits (Early Retirement Programs)
Voluntary termination benefits are those where employees are given a choice, within a certain timeframe (window), to elect to be terminated or retire. The incremental cost of these programs, if any, should be accrued in total when the employee accepts the offer. If the election window for a program falls within a calendar year, the accrual may be made at the end of the window period. If the window crosses year-end care should be taken to accrue costs only for those who have indicated acceptance of the program.24
Subsequent Adjustments to Accruals
In periods after initial measurement (communication date), changes in the accrued liability due to revisions in either the timing or amount of the estimated cash payments should be recognized as an increase or decrease to the same expense line items as when the liability was initially recognized. For example, if employees to be involuntarily terminated leave prior to the payment date (either within or outside the Bank), the liability recognized by the Bank for termination benefits should be reduced, this reduction would result in a credit to expense for that period. Consistent with the current practice of adjusting accruals for compensated absences, Reserve Banks should adjusted these accounts whenever there is a significant event, such as the close of a window period, and at the end of each quarter.
Retirement Related Benefits (Pension and Medical)
In general, the enhanced pension benefits will be treated as an amendment to the retirement plan and accounted for in accordance with FASB Topic ASC Topic 715-30; formerly SFAS No. 87 on the New York Reserve Bank's financial statements based on the actuarial valuation. An evaluation of whether the magnitude of the terminations and retirements System-wide is large enough to require curtailment accounting will be evaluated near year-end.
The effect of employee terminations on the accounting for retiree medical plans will differ depending on the number and tenure of employees terminated. If the number and tenure of terminated employees is sufficient to significantly reduce the expected years of future service of the active participants (terminated employees are considered active participants for this test), then a curtailment exists. In general, the System has viewed reductions of less than five percent as not significant for curtailment purposes and reductions of ten percent or greater as significant. Given the nature of the reductions contemplated for 2003 and 2004, Reserve Banks should consider reductions greater than five percent in a year to be a curtailment.
The impact of curtailments varies depending on the nature of each Reserve Bank's retiree medical program. In general, reductions in staff result in curtailment gains. If, however, a Reserve Bank had a substantial amount of unrecognized prior service costs or unrecognized actuarial loss, a curtailment could result in a curtailment loss. Curtailment losses are recognized when probable and estimable (communication date), curtailment gains are recognized when employees terminate. As a practical matter, Board and OEB staff will coordinate special valuations for each FRB that meets the curtailment benefit near year-end.
Operating Leases (Equipment or Facility):
If the lease will be terminated, the lease termination costs will be accrued when the lease contract is terminated. Termination of the contract is determined by the contract provisions (i.e. notifying the lessor of intent to terminate in accordance with contract provisions), or by subsequent negotiation with the counterparty.
Note: Reserve Banks are encouraged to review their operating leases to determine which should be terminated and take appropriate steps to meet the termination test.
If the lease will not be terminated, a liability for costs that will continue to be incurred under the lease contract without economic benefit to the Bank shall be recognized when the Bank ceases using the asset (cease-use date)25. This liability should be measured at its fair value on the cease-use date. Due to the complexity of this accrual, Reserve Banks should contact the Board's Financial Accounting Section for detailed, case-by-case guidance. In general, this liability should be the present value of remaining lease payments after the cease-use date reduced by estimated sublease rentals that could be reasonably obtained for the asset, even if the Bank does not intend to enter into a sublease. If the value of the sublease rentals exceeds the lease costs, no liability (or asset) is recognized.
Long Lived Asset Impairment: Facilities, Equipment, Software, and Capital Leases
Impairment of long-lived assets exist when the fair value of the assets are less than the carrying value (book value). In general, an impairment loss is recognized when impairment exists and the carrying value is not recoverable. The distinctions and process for recognizing impairment losses can be complicated and confusing. To simplify the process as much as possible the instructions below are presented as a series of steps/questions based on the requirements for FASB ASC Topic 640-10; formerly SFAS No. 144.
Grouping of Assets:
For purposes of evaluating and recognizing impairment losses, assets should be grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.26 For example, a check only facility to be closed would group all of its equipment into one group. Other likely groupings include: buildings including general improvements, land, specialized improvements (those related to a unique function), and leasehold improvements.27 In the case of assets (groups) that do not have cash flows that are identifiable as largely independent of the other assets of the Bank, such as head office buildings, those assets should be grouped with all the assets of the Bank.
Step 1: Is this asset (group) available for sale?
If an asset is held for sale, then it is recorded at its fair value less selling costs and not depreciated (even if it is still being used). There are six conditions that must be met in order to classify an asset as held for sale. In most cases we do not expect that the second test will be met until 2004 and therefore should be evaluated for impairment as an asset held for use (steps 2 -5).
- Management commits to a plan to sell the asset (group).
- The asset (group) is available for immediate sale in its current condition.
- An active program to find a buyer has been initiated.
- The sale is expected to be completed within one year.
- The asking price is reasonable in relation to fair value.
- Actions taken indicate that it is unlikely that the plan to sell will be withdrawn or significantly changed.
Step 2. Do events or circumstances exist that indicate a need to consider an impairment loss?
The purpose of this requirement is to avoid requiring annual reviews of all assets for impairment. Examples of the types of events/circumstances are:
- Significant decrease in the market price of the asset.
- Significant adverse change in the extent or manner in which the asset will be used or in its physical condition.28
- Significant adverse change in legal factors or the business climate that could affect the value of the asset.
- Accumulation of costs significantly in excess of the amount expected for the acquisition or construction of the asset.
- A current expectation that it is "more likely than not" that the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Step 3: Does the carrying value (book value) exceed the amount that can be recovered (undiscounted net cash flows)?
This is a critical step in the evaluation. It is important to note that this step is focused on whether the current value is recoverable not whether it is impaired. It is possible, for example, that an asset could have a carrying value well in excess of current market prices that still produces enough cash flows to cover its costs. Loss impairments are not recognized in these cases. The undiscounted cash flows include the cash flows throughout the life of the asset (group) including disposal. If, for example, the useful life of the asset is shorter because of changes in the extent of how it will be used, the cash flows should be measured over the shorter life. In the absence of a better source for cash flow information, Reserve Banks should consider the current depreciation costs as a proxy for undiscounted cash flows on assets that will continue to be used at "pre-impairment" production levels.29 If the assets will be used in a reduced capacity, a reasonable pro-ration of the current depreciation should be made. In order to balance the costs associated with estimating and evaluating an impairment loss with the benefits, impairments should only be pursued if the carrying value exceeds recovery amount by the following thresholds.30 For those assets that are grouped, the thresholds apply to the group. These measurements, and those in the remaining steps, should be made as of the date the impairment was probable and estimable. For the check restructuring program this date is generally February 10, 2003.
- Land: $500,000
- Buildings: Larger of $500,000 or $50,000 x the remaining useful life of the building
- Specialized Improvements 31: $100,000
- Equipment: $50,000
- Software: $50,000
Step 4: Determine fair value of asset and record impairment loss for the difference between carrying value and fair value.
The fair value of the asset (group) is the amount at which the asset could be bought or sold in a current arms-length transaction. The ideal method for determining fair value is to use the price for the asset if it is traded in an active market. The next best method is to base fair value on the prices for similar assets (appraisal). The remaining method is to use the discounted present value of the expected cash flows for the asset. In general, assumptions and techniques used to determine fair value should be the same that marketplace participants would use if the information is available without undue cost and effort. Otherwise, the Bank should use its own assumptions. In general, absent reasonable appraisals of market, the undiscounted amount calculated in step three will be used for those assets that will be disposed of within five years (see assumption #2). If applied to an asset that will be held for longer than five years such as a building, use the applicable U.S. Treasury rate for a security of that duration as of the impairment date. The impairment loss should be recorded as an adjustment to the asset account (proportionately to assets in a group) and a charge to the same account that would have been charged if the asset was sold.
Step 5: Once adjusted, the adjusted carrying amount becomes the new cost and subsequent restoration is not permitted. If appropriate, depreciation should be adjusted to take into account changes in estimated salvage value and useful life.
After adjusting the carrying value for an impairment loss, the remaining useful life and salvage value assumptions should be adjusted, if necessary. Subsequent depreciation should be based on the new values. For impairments being recognized for earlier in 2003 it may be necessary to readjust depreciation expense and accumulated depreciation levels. For example, if an asset was impaired as of February, 2003 and the depreciation expense after the impairment dropped by $3,000 per month, the impairment loss would still be recognized in July based on the values as of February 2003. Depreciation expense and the accumulated depreciation account will need to be reduced, however, by the $12,000 ($3,000 x 4 months).
Sale or Transfer of assets to other office
If an asset will be transferred to another office in same district, the depreciation continues and the cost to relocate and reinstall the equipment is charged to expense.32
If an asset will be sold to another District, the deprecation will cease when production ceases and the sale should be recorded at book-value (no gain or loss).33 The receiving Reserve Bank should record the asset at the previous book-value, capitalize the installation and transportation costs and begin depreciation when the equipment is placed into production.
Other Costs Associated with Exit Activities
All other exit costs, such as relocating employees and equipment, and costs associated with closing facilities should be recognized in the period the goods or services are received (see FAM .90).
22. This appendix is based on a memo issued Gregory L. Evans, Manager, RBOPS FRB Financial Accounting Section, on June 30, 2003, addressed to the Advisory Group on Financial Management. Although this memo discusses specific restructuring events that occurred in 2003-2004, the guidance is generally applicable to accounting for all restructuring events. Return to text
23. Although it is technically possible for an otherwise qualified employee to decline this option by not signing the required release those situations are too unique to cover in general instructions. Such situations should be discussed with Board Financial Accounting staff. Return to text
24. Absent a reason to believe the decision will be rescinded, verbal or written acceptance is sufficient even if the employee could legally rescind the decision for a short waiting period. Return to text
25. Possible reasons for not terminating the lease include the inability to negotiate acceptable cancellation terms or cancellation fees that are higher than the net cost of subletting the asset. Return to text
26. To the extent these assets have an associated liability, such as with a capitalized lease, the liability should also be included. Return to text
27. Software should be included with the applicable equipment. Return to text
28. In general, potential impairments related to check restructuring effort will meet this example. Return to text
29. Estimating cash flows for assets, especially those that support non-priced services areas is problematic. The basis for this proxy is the idea that the result of the pricing process is to match cash flows with costs and that the historical depreciation during full cost recovery is a reasonable proxy for the cash flows. If, a Bank has another, more accurate method, for computing true cash flows from an asset class that may be used. Return to text
30. By applying the thresholds at this point rather than after calculating the impairment loss that would be recognized some administrative costs associated with valuing the asset (group) may be avoided. Return to text
31. Specialized improvements are those separately identifiable building improvements/renovations, usually with a unique useful life, that would need to be written-off in accordance with FAM if a subsequent improvement/renovation occurs in that area. Return to text
32. Several Reserve Banks have commented on the lack of symmetry in treatment between assets transferred inter- and intra-district. Although the relocation costs do benefit future periods and were considered when deciding to relocate equipment, the accounting principles requiring such costs to be changed to expense are clear and well established. As a practical matter, we are unaware of any intradistrict equipment relocations related to the Systemwide check restructuring program. Return to text
33. An impairment loss is unlikely in this case as the "undiscounted cash flow" will include the transfer at book value to the other district. Return to text