Severance accounting under ASC 420, ASC 712 and IAS 19: when to accrue

Severance is recognized at different dates depending on which framework applies and on how the benefit is offered. Under US GAAP, severance paid under an ongoing benefit arrangement falls under ASC 712 and is accrued as soon as payment is probable and the amount can be reasonably estimated, which can be the day the board approves a layoff. One-time termination benefits fall under ASC 420 and are recognized at the communication date, or spread over the remaining service period when employees must keep working beyond a minimum retention period. Under IFRS, IAS 19 Employee Benefits recognizes termination benefits at the earlier of the date the entity can no longer withdraw the offer and the date it recognizes related restructuring costs under IAS 37.

These rules produce real timing differences. A US company with a written severance policy can book the full charge in the quarter the decision is made, before a single employee has been told, while an IFRS reporter with the same facts waits until the plan has been communicated. Retention or stay bonuses add a second layer, because both frameworks treat payments that require future service as compensation for that service and spread them over the period worked.

The question arises in every reduction in force, plant closure, office consolidation and post-acquisition integration. Controllers need the answer before quarter-end, because the classification of each component of the package (ongoing policy, one-time enhancement, retention payment, voluntary offer) decides the date of the expense, its measurement and the disclosures that follow. The worked example below follows a 40-employee closure through the journal entries under both frameworks.

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WHICH SEVERANCE GUIDANCE APPLIES UNDER US GAAP.

US GAAP does not have one severance standard. The starting point is the nature of the arrangement under which the benefit is paid, and three sets of guidance divide the territory.

ASC 712 Compensation, Nonretirement Postemployment Benefits covers benefits provided to former or inactive employees under an ongoing arrangement. The original standard, FASB Statement No. 112, listed severance benefits, disability-related benefits, job training and counseling, and continued health care or life insurance coverage as examples. An arrangement is ongoing when it is written into a plan or employee handbook, or when it is a substantive plan established through a consistent past practice of paying similar benefits in prior layoffs. Benefits that vest or accumulate and relate to services already rendered are accrued under the compensated absences model in ASC 710; the rest are accrued under the loss contingency model in ASC 450, which requires that the liability be probable and the amount reasonably estimable.

ASC 420 Exit or Disposal Cost Obligations covers one-time termination benefits: benefits provided under a one-time arrangement created for a specific termination event, such as a special package designed for a plant closure. ASC 420 carries forward FASB Statement No. 146, which defined the communication date and the recognition pattern discussed below.

ASC 715 covers special termination benefits offered for a short period in exchange for voluntary termination, typically early retirement windows, and contractual termination benefits required by the terms of an existing plan or agreement when a specified event occurs. Special termination benefits are recognized when employees accept the offer and the amount can be reasonably estimated; contractual termination benefits are recognized when it is probable that employees will be entitled to them and the amount can be reasonably estimated.

The first judgement in any layoff is therefore whether the package is ongoing or one-time. A company that has paid two weeks per year of service in its last three reductions in force has a substantive plan even if nothing is written down, and that component sits in ASC 712. A one-off enhancement negotiated for this closure sits in ASC 420. Many packages contain both, and each piece is accounted for separately.

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ONE-TIME TERMINATION BENEFITS UNDER ASC 420: THE COMMUNICATION DATE.

Under ASC 420 a liability for one-time termination benefits exists only when a plan of termination has been communicated to employees and meets four criteria carried forward from Statement 146. Management with the authority to approve the action commits to a plan of termination. The plan identifies the number of employees to be terminated, their job classifications or functions, their locations and the expected completion date. The plan sets out the benefit terms in enough detail for employees to determine the type and amount of benefits they will receive if involuntarily terminated. Actions required to complete the plan indicate that significant changes to the plan are unlikely.

Board approval alone is never enough. A plan approved on the last day of a quarter and communicated a week later produces no ASC 420 liability at the quarter-end, even when the amounts are known precisely, because the communication date falls in the following period.

Once the communication date is reached, the recognition pattern depends on whether employees must keep working. When employees are not required to render service until they are terminated in order to receive the benefits, or will not be retained beyond the minimum retention period, the full liability is recognized at the communication date and measured at fair value. The minimum retention period cannot exceed the legal notification period, or 60 days when there is no legal notification requirement. In the United States the federal WARN Act notice period often sets that legal period for qualifying plant closings and mass layoffs.

When employees must render service beyond the minimum retention period, the liability is measured at the communication date, based on fair value as of the termination date, and recognized ratably over the future service period. Changes in the timing or amount of expected payments are recognized as an adjustment to the liability in the period of the change, with a cumulative catch-up for the portion of the service period already elapsed.

Fair value for short-dated severance is usually the undiscounted payment, because discounting a payment due within a few months is immaterial. Benefits paid in installments over a longer period are discounted using a credit-adjusted risk-free rate under the ASC 420 measurement framework.

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HOW IAS 19 RECOGNIZES TERMINATION BENEFITS.

IAS 19 defines termination benefits as employee benefits provided in exchange for the termination of an employee's employment as a result of either an entity's decision to terminate the employment before the normal retirement date or an employee's decision to accept an offer of benefits in exchange for the termination of employment. IFRS does not distinguish between ongoing and one-time arrangements for this purpose: a severance payment triggered by the entity's decision is a termination benefit whether it comes from a long-standing policy or a package written for a single closure.

The recognition rule in the termination benefits section of IAS 19 (paragraphs 165 to 168) requires the entity to recognize a liability and expense at the earlier of two dates: when the entity can no longer withdraw the offer of those benefits, and when it recognizes costs for a restructuring that is within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets and involves the payment of termination benefits.

For involuntary terminations, the entity can no longer withdraw the offer once it has communicated to the affected employees a plan of termination that meets criteria close to the ASC 420 list: the actions required to complete the plan indicate that significant changes are unlikely, the plan identifies the number of employees, their job classifications or functions, their locations and the expected completion date, and the plan sets out the benefits in enough detail for employees to determine what they will receive. For voluntary offers, the relevant date is the earlier of when the employee accepts the offer and when a restriction on the entity's ability to withdraw the offer takes effect, such as a legal or contractual requirement.

The IAS 37 route can bring recognition forward. A restructuring provision requires a constructive obligation, which exists when the entity has a detailed formal plan and has raised a valid expectation in those affected that it will carry out the restructuring, by starting to implement the plan or by announcing its main features to them. In practice the two dates often coincide, because announcing the restructuring to employees is also the communication of the termination plan.

Benefits that require employees to keep working are excluded from termination benefits. A retention payment conditional on staying until the closure date is compensation for that future service and is accounted for as a short-term or other long-term employee benefit, recognized as the service is rendered. Benefits payable regardless of the reason the employee leaves, such as some statutory end-of-service indemnities, are post-employment benefits and are measured under the post-employment requirements of IAS 19.

Measurement follows the nature of the benefit (paragraphs 169 and 170). Termination benefits expected to be settled wholly within twelve months after the end of the annual reporting period in which they are recognized are measured under the short-term employee benefit requirements, without discounting. Benefits settled later are measured under the requirements for other long-term employee benefits, which means discounting and remeasurement through profit or loss. When termination benefits take the form of an enhancement of post-employment benefits, such as extra pension credit for employees leaving early, the post-employment requirements apply.

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SEVERANCE RECOGNITION: ASC 420, ASC 712 AND IAS 19 COMPARED.

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Point	US GAAP	IFRS (IAS 19)
Ongoing severance policy	ASC 712: accrue when probable and estimable	Termination benefit: earlier of no-withdraw date and IAS 37 restructuring
One-time package	ASC 420: communication date	Same rule as any termination benefit
Board approval only	ASC 712 can be met; ASC 420 is not	Usually not enough
Stay requirement beyond 60 days	ASC 420: whole benefit spread over service	Retention part is employee compensation over service
Voluntary offer	ASC 715: when employees accept	Earlier of acceptance and withdrawal restriction
Measurement	Fair value (ASC 420); estimate (ASC 712)	Short-term or other long-term rules
Discounting	Credit-adjusted risk-free rate if material	Only if settled after twelve months

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The largest practical difference concerns ongoing arrangements. Under ASC 712 the trigger is probability, and a layoff decision approved by the board makes payment probable for the employees identified, even before they are told. IAS 19 requires either an offer that can no longer be withdrawn or a constructive obligation under IAS 37, and neither exists while the plan is still confidential.

The second difference concerns stay requirements. ASC 420 applies a mechanical test. When employees must work beyond the minimum retention period to receive a one-time benefit, the whole benefit is spread over the service period. IAS 19 asks whether each payment is made in exchange for the termination or for future service, with a future-service condition treated as an indicator of the latter. A package can therefore be split under IFRS, with the part payable on termination recognized at the no-withdraw date and the part earned by staying recognized over the service period.

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WORKED EXAMPLE: SEVERANCE AND RETENTION BONUS JOURNAL ENTRIES.

A manufacturer with a December 31 year-end and quarterly reporting decides to close one plant. The board approves a detailed closure plan on September 25, 2026. The plan is communicated to the 40 affected employees on October 5, 2026, with a termination date of January 31, 2027. The figures are illustrative.

The company has a written severance policy, applied consistently in earlier layoffs, paying two weeks of base pay per year of service on involuntary termination. Average weekly pay is $1,500 and average service is 10 years, so each employee receives $30,000 and the policy component totals $1,200,000. For this closure the company also offers a one-time retention bonus of $6,000 per employee, $240,000 in total, payable only to employees who stay until January 31, 2027. All amounts are paid on January 31, 2027, and the company expects every employee to stay.

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Component	Amount	US GAAP model	IFRS model
Policy severance (40 x $30,000)	$1,200,000	ASC 712	IAS 19 termination benefit
Retention bonus (40 x $6,000)	$240,000	ASC 420, ratable	IAS 19 short-term benefit
Total package	$1,440,000

........

Under US GAAP, the policy severance is accrued in the third quarter. At September 30, 2026 the board has approved the closure, the employees and amounts are identified, and payment under the existing policy is probable and reasonably estimable. The retention bonus is a one-time benefit under ASC 420; employees must work 119 days from the communication date to the termination date, longer than the 60-day minimum retention period, so the $240,000 is recognized ratably from October 5, 2026 to January 31, 2027. The 88 days falling in 2026 carry $177,478.99 and the 31 days in January 2027 carry $62,521.01.

Under IFRS, nothing is recognized at September 30, 2026. The plan is still confidential, so the company can withdraw it and has not raised a valid expectation under IAS 37. On October 5, 2026 the plan is communicated, the offer can no longer be withdrawn, and the full $1,200,000 is recognized as a termination benefit. The retention bonus is conditional on future service and is recognized over the same 119 days, which gives the same split as US GAAP in this example.

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Date	Account	Debit	Credit
Sep 30, 2026 (US GAAP only)	Severance expense	1,200,000.00
Sep 30, 2026 (US GAAP only)	Accrued severance		1,200,000.00
Oct 5, 2026 (IFRS only)	Termination benefit expense	1,200,000.00
Oct 5, 2026 (IFRS only)	Termination benefit liability		1,200,000.00
Oct-Dec 2026 (both)	Retention bonus expense	177,478.99
Oct-Dec 2026 (both)	Accrued retention bonus		177,478.99
Jan 2027 (both)	Retention bonus expense	62,521.01
Jan 2027 (both)	Accrued retention bonus		62,521.01
Jan 31, 2027 (both)	Accrued severance or liability	1,200,000.00
Jan 31, 2027 (both)	Accrued retention bonus	240,000.00
Jan 31, 2027 (both)	Cash		1,440,000.00

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The fourth-quarter retention expense under both frameworks is booked monthly: $54,453.78 for the 27 days in October, $60,504.20 for November and $62,521.01 for December, which sums to $177,478.99. Total debits and credits across the full sequence for each framework equal $2,880,000.00, and both liabilities are fully settled by the January payment.

The result is a $1,200,000 difference in third-quarter operating expense between the two frameworks and no difference for the full year 2026. A September 30 interim report prepared under US GAAP shows the closure charge and the accrued severance; the same report under IFRS shows neither, and at most a disclosure of the October 5 announcement as a non-adjusting event after the reporting period under IAS 10.

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PRESENTATION AND DISCLOSURE OF TERMINATION BENEFITS.

ASC 420 requires disclosures in the period an exit or disposal activity is initiated and in subsequent periods until it is completed: a description of the activity and its expected completion date, the total amount expected to be incurred for each major type of cost, the amount incurred in the period and cumulatively, a reconciliation of the beginning and ending liability showing charges, payments and adjustments, the line item in the income statement where the costs are presented, and the same information by reportable segment. Severance accrued under ASC 712 is often included in the same restructuring note, with a clear statement of which guidance applies to each component. The presentation of these charges in the income statement is covered in more detail in how restructuring costs are reported in the income statement.

IAS 19 does not prescribe specific disclosures for termination benefits (paragraph 171), but other standards do. IAS 24 requires disclosure of termination benefits paid to key management personnel, and IAS 1 requires disclosure of employee benefits expense. When a restructuring provision is recognized, IAS 37 requires the movement in the provision, a description of the obligation, the expected timing of outflows and the uncertainties involved, following the general provision rules described in how provisions and contingent liabilities are recognized under IAS 37 and ASC 450.

Related costs of an exit plan follow their own rules. Contract termination costs and other exit costs fall within ASC 420 under US GAAP and within IAS 37 under IFRS, and loss-making contracts that remain in force are assessed under the guidance discussed in onerous contracts under IAS 37 vs US GAAP.

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COMMON ERRORS IN SEVERANCE ACCRUALS.

Treating every layoff package as one-time is the most frequent error in US GAAP reporting. A company with a consistent practice of paying severance has an ongoing arrangement under ASC 712 even without a written policy, and waiting for the ASC 420 communication date understates expense in the period the decision was made.

The opposite error is accruing a one-time package at board approval. ASC 420 is explicit that the liability does not exist until the plan is communicated to employees, and auditors test the communication date against the evidence of meetings, letters and notices.

Stay requirements are often misread. Under ASC 420 the test is whether employees must work beyond the minimum retention period, which is the legal notification period or 60 days. A 45-day notice with no legal notification requirement produces immediate recognition; a 90-day stay requirement produces ratable recognition of the whole benefit. Under IFRS the question is whether each payment depends on future service.

Estimates also need updating. Employees who leave early and forfeit retention bonuses, redeployments that reduce the number of terminations, and changes in the termination date all change the liability. Under ASC 420 the cumulative effect of a revised estimate is recognized in the period of the change. Bonus accruals that sit alongside severance in the same quarter follow the logic discussed in how year-end bonuses are accrued under ASC 710 and IAS 19.

For IFRS reporters, the voluntary route is easy to miss. An early retirement window is recognized when employees accept or when a restriction on withdrawing the offer takes effect, so an offer that is open across a reporting date is recognized only for the acceptances received by that date, unless a restriction applies.

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SEVERANCE ACCRUAL CHECKLIST FOR QUARTER-END.

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Step	Question to answer
1	Is each component ongoing, one-time, voluntary or contractual?
2	Under US GAAP, is payment under an ongoing plan probable and estimable?
3	Was the plan communicated before the reporting date, meeting all four criteria?
4	Must employees work beyond the legal notice period or 60 days?
5	Under IFRS, can the offer still be withdrawn at the reporting date?
6	Has an IAS 37 restructuring provision been recognized earlier?
7	Which payments depend on future service?
8	Is settlement after twelve months, requiring discounting?
9	Are forfeitures and changes in headcount reflected in the estimate?
10	Does the note include the ASC 420 roll-forward or IAS 37 movement?

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SEVERANCE UNDER ASC 420, ASC 712 AND IAS 19: TIMING JUDGEMENTS THAT DECIDE THE QUARTER.

Three conclusions hold in every case. Severance paid under an ongoing US arrangement is accrued under ASC 712 when payment becomes probable and estimable, which can precede any announcement. One-time termination benefits under ASC 420 are recognized at the communication date of a plan meeting four specific criteria, and spread over the service period when employees must work beyond the legal notification period or 60 days. Under IAS 19 the trigger is the earlier of the date the offer can no longer be withdrawn and the date an IAS 37 restructuring provision is recognized, and only payments that depend on future service are spread.

The judgements sit in the facts. Whether past practice amounts to a substantive plan, whether the plan communicated to employees was detailed enough to meet the criteria, how long the legal notification period is in each jurisdiction, and whether a retention payment rewards future service or simply defers part of the severance are questions each company answers from its own documents. For a closure decided near a quarter-end, those answers can move a seven-figure charge from one quarter to the next, and the difference between the US GAAP and IFRS dates is often the first reconciling item a dual reporter must explain.

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