Contractual Termination Benefits
The term contractual termination benefits refers to compensation provided under an ongoing plan to individuals that have severed their employment relationship with a company. Termination benefits are typically classified as contractual, one-time, special and other postemployment.
Under certain operating conditions, a company may institute programs aimed at encouraging employees to voluntarily terminate employment. Alternatively, a company may deem it necessary to involuntarily sever its employment relationship with a group of individuals. When this occurs, the company may provide early termination benefits to those affected individuals.
Contractual benefits are those provided to employees as part of an existing plan that outlines the assistance the company will provide to employees upon termination. That is to say, the company has a documented policy that outlines the benefits a former or inactive employee is entitled to upon termination, as well as the events that trigger this benefit. For example, a company may have a written policy stating employees that lose their jobs as a result of a manufacturing plant closing are entitled to two weeks of severance pay for every year of service with the company.
These benefits can include compensation paid in lump-sums, periodically, or a combination of the two. It may also include supplemental unemployment benefits, job retraining, as well as outplacement services. Companies record these costs according to FASB Accounting Standards Codification Topic 712, Compensation - Nonretirement Postemployment Benefits. This standard states that companies should accrue contractual termination benefits at the time it is both probable the employee will be entitled to this benefit and the employer can reasonably estimate the amount to be paid. The standard also specifically states the benefit should not be accrued based on an estimated rate of acceptance.
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