Staff Accounting Bulletin No. 100 –
Restructuring and Impairment Charges
November 24, 1999
Staff Accounting Bulletin (SAB) No. 100 provides guidance on the accounting for and disclosure of certain expenses and liabilities commonly reported in connection with restructuring activities and business combinations, and the recognition and disclosure of asset impairment charges. SABs are not rules or interpretations of the Commission; they represent interpretations and practices followed by staff of the Office of the Chief Accountant and the Division of Corporation Finance in administering the disclosure requirements of the federal securities laws.
The staff has become increasingly concerned with apparent increases in inappropriate earnings management activities by public companies. One area of concern is where a company fails to comply with generally accepted accounting principles (GAAP) and manages results to conform with market expectations. Examples include inappropriately recording restructuring charges and general reserves for future losses, reversing or relieving reserves in inappropriate periods, and recognizing or not recognizing an asset impairment charge in the appropriate period.
On September 28, 1998, in response to growing concerns about registrants misapplying GAAP in order to manage earnings, SEC Chairman Arthur Levitt gave a speech entitled, The Numbers Game. One of the accounting gimmicks that the Chairman cited in his speech was the abuse of restructuring charge accounting. He stated:
‘Let me first deal with "Big Bath" restructuring charges.
Companies remain competitive by regularly assessing the efficiency and profitability of their operations. Problems arise, however, when we see large charges associated with companies restructuring. These charges help companies "clean up" their balance sheet – giving them a so-called "big bath."
Why are companies tempted to overstate these charges? When earnings take a major hit, the theory goes Wall Street will look beyond a one-time loss and focus only on future earnings.
And if these charges are conservatively estimated with a little extra cushioning, that so-called conservative estimate is miraculously reborn as income when estimates change or future earnings fall short.
When a company decides to restructure, management and employees, investors and creditors, customers and suppliers all want to understand the expected effects. We need, of course, to ensure that financial reporting provides this information. But this should not lead to flushing all the associated costs – and maybe a little extra – through the financial statements.’
Summary of Staff Interpretations
The SAB reiterates the currently existing criteria stated in Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-3), EITF Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (EITF 95-3) and Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), and, also provides guidance on how the staff interprets and applies those criteria. It states that costs or charges falling within the scope of EITF 94-3, EITF 95-3, or SFAS 121, must be accounted for in accordance with the appropriate standard and that EITF 94-3, EITF 95-3, and SFAS 121 should not be applied to events or circumstances falling outside their respective scopes. Furthermore, the SAB provides examples to illustrate the staffs' interpretations of how this accounting literature should be applied. Registrants are reminded of the disclosures required by EITF 94-3, EITF 95-3, and SFAS 121, as well as their required frequency. In addition, investors are informed of the additional disclosures that the staff has requested to enhance financial statement transparency. It provides the staff's views regarding assessing and measuring enterprise level goodwill for impairment in accordance with Accounting Principles Board Opinion No. 17, Intangible Assets. The SAB also states that depreciable lives, amortization periods, and salvage values of long-lived assets need to be reviewed, and where appropriate, changed on a timely basis. Finally, the SAB provides the staff's views regarding the measurement of liabilities and other loss accruals assumed in a purchase business combination.
For further information concerning the SAB, please contact Paul Kepple or Eric Casey in the Office of the Chief Accountant at (202) 942-4400, or Robert Bayless in the Division of Corporation Finance at (202) 942-2960.