To: Dr. John J. Morris, Department of Accounting
From: Group #2 (Jordan King, Kelsey Darnell, Xiaomeng Liao)
Subject: ACCTG 642: Case 08-6, The Rump Organization
Statement of Relevant Facts
The Rump Organization is a commercial real estate company that purchases and constructs commercial property. On the basis of the corporate restructuring plan, Rump’s CEO, Ronald Rump, and Rump’s board of directors on December 27, 2005 approve a plan to involuntarily terminate 100 of the company’s employees. The plan provides for each terminated employee to receive a lump-sum cash payment equal to one month’s salary only if the employee voluntarily signs a waiver of any right to legal action against Rump.
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There are three alternative arguments that we considered when coming to our conclusion: 1. Rump should not recognize a liability for the employee termination benefits. a. ASC 420-10-25-2 states that an exit or disposal plan, by itself, does not create a present obligation to others for costs expected to be incurred under the plan; thus, an entity’s commitment to an exit or disposal plan, by itself, is not the event for recognition of a liability. i. According to ASC 420-10-25-5, The Rump organization created a liability at the communication date to provide the termination benefits if employees are terminated, since that is what they promised to those employees who signed the termination waiver. 1. The communication date is defined in the glossary of the ASC as “the date the plan of termination for one-time employee termination benefits meets all of the criteria in paragraph 420-10-25-4 and has been communicated to employees.” a. The communication date is December 31, 2005. That is when the employees were emailed the details of the termination plan. b. We concluded that the following criteria described in ASC 420-10-25-4 was met: i. Management did commit to a plan of termination. ii. The plan did identify that 100 employees were to be terminated by January 31, 2006 and included the