Question

Should the lease termination costs be accrued as of Dec 31? If not, when should they be accrued? Can you find examples from SEC filers of their accruals of contract termination costs? Sears may be a good company to look at for this to start. Please apply GAAP principles.

Answer 1

Answers : -

The lease termination costs should be accured on according to the lease agreement. The accured cost does not affect the financial statements. The cost should be accured when the lease agreement is terminated.

Answer 2

GAAP Guidance on Accruing Lease Termination Costs

1. When to Accrue Lease Termination Costs (Under ASC 420 & ASC 842):

• Accrue by Dec 31 if both conditions are met:

1. Commitment to Terminate: The company has approved and communicated a formal plan (e.g., board resolution, signed agreement) on or before Dec 31.

2. Likelihood of Payment: Costs are probable and reasonably estimable (e.g., penalties defined in lease agreements).

• If criteria are not met by Dec 31: Accrue in the period when the termination plan is finalized (e.g., Q1 of the next fiscal year).

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2. SEC Filer Examples (Sears Holdings):

• Sears (2018 10-K): Accrued $286M in "lease termination costs" under ASC 420 when stores were identified for closure. Costs included:

• Future rent payments (discounted to present value).

• Penalties for early termination.

• Accounting Policy: Recognized when the closure decision was approved and communicated to employees/landlords.

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3. GAAP Principles Applied:

• ASC 420 (Exit Costs): Requires accrual upon commitment to a termination plan, not just intent.

• ASC 842 (Leases): Termination fees are included in lease liability calculations if triggered by the lessee’s action.

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4. Key Documentation Needed:

• Signed termination agreements or board minutes approving the plan.

• Calculations of termination fees (e.g., remaining rent, penalties).

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Recommendation:

• If the termination plan was finalized by Dec 31: Accrue in year-end financials.

• If not: Disclose as a contingency until finalized (per ASC 450).

For audit support, reference SEC filings like Sears (2018) or Macy’s (2020) for real-world applications of GAAP.

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Answer:
Accrue by Dec 31 only if the termination plan was formally approved by that date;