Severance — One-Time Termination Benefit (ASC 420) vs. Ongoing Benefit Arrangement (ASC 712)

💡 Accountant's Note

Severance accounting hinges on a critical ASC distinction: (1) ONE-TIME TERMINATION PLAN (ASC 420): A specific workforce reduction with defined terms communicated to affected employees. The company announces a layoff affecting 500 employees with severance of 2 weeks per year of service. Under ASC 420: if the employee is required to render service until termination to receive the benefit — accrue over the 'minimum retention period' (e.g., if employees must work through a 90-day wind-down period, accrue the severance ratably over those 90 days; if no service condition, accrue immediately when the plan is communicated). (2) ONGOING BENEFIT ARRANGEMENT (ASC 712): if the company has an existing severance policy (e.g., 'all employees terminated without cause receive 2 weeks per year of service') — accrue severance when a specific employee is terminated. The ongoing policy creates a liability when it is probable that terminations will occur (not pre-accrued for the whole workforce). The distinction matters: ASC 420 is the 'restructuring charge' that creates a large one-time expense when announced; ASC 712 creates smaller charges at each individual termination.