IFRS Case

Re structuring Costs

Pharma Co. (Pharma or the Company) is a U.S. subsidiary of a U.K. entity that prepares its financial statements in accordance with (1) U.S. GAAP for reporting to its U.S.-based lender and (2) IFRSs in reporting to its parent. Pharma is in the process of restructuring a business line. As part of the restructuring, the Company is considering the relocation of a manufacturing operation from its present location to a new facility in a different geographic area. The relocation plan would include terminating certain employees.

IAS 37 includes guidance for accounting for restructuring costs in accordance with IFRS. Paragraph 10 of IAS 37 defines restructuring as follows:

[A] programme that is planned and controlled by management, and materially changes either:

a. the scope of a business undertaken by an entity; or b. the manner in which that business is conducted.

Under IFRSs, emphasis is placed on the recognition of the costs of the exit plan as a whole, whereas under ASC 420-10 in U.S. GAAP, each type of cost should be examined individually to determine when it should be accrued. As a result, there may be differences in timing of recognition of restructuring costs under IFRSs and U.S. GAAP.

Pharma has taken the following actions:

1. On December 15, 2014, Pharma issued a press release announcing its intentions to terminate the lease of the old facility. The press release is included as Appendix A. Assume the terms of the lease are such that Pharma accounts for the lease as an operating lease. Further, the lease agreement stipulates that written notice is required for early termination.

2. On December 27, 2014, Pharma management communicated the main features of a one-time, non-voluntary termination plan to its employees. The communication to the employees is included as Appendix B.

3. Pharma will incur a relocation cost of $500,000 and staff training cost of $1.5 million. Further, the Company has entered into irrevocable contracts with certain other relevant parties to affect the restructuring plan over the following 18 months.

4. The cost to dismantle the existing manufacturing operation is estimated to be $1 million. In the jurisdiction in which Pharma operates its current facility, there is no legal obligation for dismantling plants when abandoned. Pharma has not historically dismantled its plants when abandoned but decided to make an exception. In a press release, the Company has stated its intention to dismantle the existing operation. The costs to reassemble the operation in the new facility have not yet been finalized.

Re quire d:

In reporting to its U.K. parent under IFRSs, how should Pharma account for the above restructuring program for the year ended December 31, 2014?

In reporting to its U.S.-based lender in accordance with U.S. GAAP, how should

Pharma account for the restructuring program for the year ended December 31,

2014?