Hincapie AG manufactures specialty bike accessories. The company is best known for its product quality, and it has offered one of the best warranties in the industry on its higher-priced items—a lifetime guarantee. The warranty on these products is included in the sales price. Hincapie has a contract with a service company, which performs all warranty work on Hincapie products. Under the contract, Hincapie guarantees the service company at least €200,000 of warranty work for each year of the 3-year contract.

A recent economic recession has been hard on Hincapie’s business. Sales for its higher-end products have been especially adversely impacted. As a result, Hincapie is planning to restructure its highquality lines by moving manufacturing for those products into one of its other factories, shutting down assembly lines, and terminating workers. In order to keep some workers on board, Hincapie plans to bring all warranty work in-house. It can terminate the current warranty contract by making a one-time termination payment of €75,000.

Management discussed the restructuring plans in November 2021; they plan to get approval from the board of directors at the December board meeting and execute the restructuring in early 2022. Given the company’s past success, the accounting for restructuring activities has never come up. Hincapie would like you to research how it should account for this restructuring according to IFRS.

Instructions

Access the IFRS authoritative literature at the IFRS website (you may register for free IFRS access at this site). When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. Provide paragraph citations.

a. Identify the accounting literature that addresses the accounting for the various restructuring costs that will be incurred in the restructuring.

b. Advise Hincapie on the restructuring costs. When should Hincapie recognize liabilities arising from the restructuring? What costs can be included? What costs are excluded?

c. Does Hincapie have a liability related to the service contract? Explain. If Hincapie has a liability, at what amount should it be recorded?