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This instruction note applies to all types of shutdowns whether it is a temporary production shutdown or a definitive plant shutdown, shutdown of a commercial, research, or service provider activity.
Note that, regarding temporary shutdowns for over 30 days, the rule only applies to unit or part of a unit put “on ice” where there are uncertainties about when the installation will restart whereas there are no decisions taken about a definitive shutdown (reported figures below gross margin). When the period of the shutdown exceeds 30 days in the case of normal business conduct (e.g.: shutdown as a result of the termination of a batch production awaiting the next one, a temporary stop of sales), the related figures are reported above gross margin.
Among the costs directly or indirectly associated with shutdown of an activity, there must be a distinction made between those for which a provision shall be recognized and those for which provisions are not authorized by IAS 37.
Shutdowns, whether temporary or definitive, distort production costs. The purpose of this memo is to determine which shutdowns are of a scale to warrant recording the costs generated under other headings on the income statement. In other cases, the cost incurred should remain under production costs.
In the case of an economic crisis, the costs linked to the situations where the production is low or where the plant is temporary idle are reported under R25490 “Non-proportional costs of sales”.
This is where a unit or part of a unit is on “stand-by”, i.e. production stops for a period of 30 days or less (e.g. holidays, downtime, periodic maintenance not being subject to activation, unforeseen shutdowns owing for example to manufacturing incidents).
If production is stopped, the related costs can't / shouldn't flow to cost of sales, since we cannot consider that situation as "normal condition of operations". In RCS, these costs flow to R25470 “Absorption variance: Non-proportional costs absorbed in inventory”. In PF1, the costs are shown under R27900 “Miscellaneous production”.
Examples of costs to be considered under shutdown costs:
This is where a unit or part of a unit is “awaiting assignment” or “mothballed” i.e. shutdown for a period exceeding 30 days. In here, we may face cases where there are uncertainties about when the installation will restart whereas there are no decisions taken about a definitive shutdown.
In such cases, the associated expenditure is charged to the BU, posted on the cost center “shutdown costs”, and allocated to R38100 “Other recurring operating income and expenses” for the corresponding division.
In either case, the shutdown may be accompanied by protection and conservation measures.
However, there are cases where the shutdown period exceeds 30 days and that ought to be reported above gross margin. The corresponding under-activity is analyzed through the difference between period fixed costs and fixed costs absorption. Such cases exist when they fall under the normal business conduct. Examples:
The definitive shutdowns include final shutdown of the plant’s production, cessation of a commercial or research activity or a service provider (list not exhaustive).
Expenses incurred as a result of a definitive shutdown are charged to the BU, posted on the cost center “shutdown costs”, and allocated to R48690 “Other non-recurring expenses”.
These are more difficult to identify and measure. They relate to certain items on the balance sheet (fixed assets, working capital, etc.) or operating statement (income and expenses).
The table below presents the steps to be performed when shutting down plants or unit in plants:
In case of shutdown decision, demolition is recommended. If demolition is not pursued, this has to be reported to ComEx.
Demolition should occur within 3 years following the shutdown decision after validation of demolition and associated costs by the Industrial Function.
Provision for deactivation, decontamination, demolition, and remediation obligations are to be recognized at the time of announcement of competitiveness or restructuring. Recognition of provision requires either legal or constructive obligation (i.e. an announcement). An internal approval/ComEx note is not sufficient to recognize a provision.
The P&L and cash flow impacts should be recorded as follows:
Restructuring is a cessation of activities at a production unit or part of a unit. Note that each qualification of “restructuring” plan should be presented to the COMEX. The activity in question is no longer a going concern.
Where this is the case, the principles of sound management (and accounting regulations) demand that, when the decision is made and communicated:
The provisions recognized must cover, among others
direct (staff appointed to the unit) social security costs up to the full implementation of the redundancy package prepared, planned (early retirement, etc.). In the event of an internal staff transfer, the costs relating to the person concerned are taken on by the new department and no provisions can be recognized in this respect. Similarly, no provisions can be recognized for (re)training costs
This requires a full and realistic evaluation of the net costs (*) of restructuring to avoid penalizing the activities of other businesses.
(*) Forecast expenditure does not include estimate of income from sale of assets.
When land/material/personnel are reallocated, the corresponding commitments cease.
These forecast net costs are recognized in the income statement under R48690 “Other non-recurring expenses” with, as counterpart, provisions, working capital, and cash, with the exception of impairment losses, which are posted to under R45500 “Restructuring – impairment of intangible and tangible assets”.
The Comex memo for the shutdown must include all of the associated costs, including the costs which are not covered by provisions: potentially subsequent costs of demolition from subsequent operations, indirect costs of downsizing and related legal costs.
Note that, regarding rehabilitation costs, an assessment must be conducted and a rehabilitation plan drawn up for known, identified problems. Hidden problems are charged to the company as a whole. Rehabilitation costs are reported under R48650 “Environmental expenses and income”.
In here, the activity remains a going concern. For instance, the definitive shutdown of an old production line, regardless of whether it is replaced by a new one; down-sizing of a commercial office, etc...
Here also, the resulting net costs must be identified and valued to avoid penalizing the activities of other businesses. The forecast net costs are recorded in the income statement for the activity in question among the recurring items above Underlying EBIT:
In the majority of service contracts, external and internal, compensation for termination is dealt with in a contractual clause. In case of termination without notice, this clause is used in order to obtain compensation designed to cover certain fixed costs of the service provider.
In an effort at uniformity, the compensation for contractual termination is treated as follows:
must be covered by provisions when the criteria of the IAS 37, par 70-83 are met (among others, restructuring decided upon, announced, etc.). Remember that a provision can never be used to adjust the value of an asset. In accordance with IAS 36, an impairment test of the installations shall be carried out in case the entity identifies asset impairment triggers. A contract termination can constitute an asset impairment trigger. Restructuring = the activity is no longer a going concern and, Recovery Plan = the activity is a going concern.The service beneficiary records the cost of the compensation for termination under R48690 “Other non-recurring expenses”.
Cessation of an activity includes termination of existing service contracts between the activity shut down and the remaining activities and service providers, which should generally downsize. For the service providers, this leads to additional charges which have to be reabsorbed within a maximum time frame of 2 years (starting from cessation of activity).
Forecast costs
As IAS 37, par 63 does not allow recognition of provisions covering future operating losses, the future downsizing costs linked to restructuring or sale of the activity should be recognized under R48690 “Other non-recurring expenses”, during the transition period, as they are incurred as long as it deals with the costs of downsizing forecast.
Based on last contract in effect.
These costs are however allocated, during the transition period, to the activity shut down. These costs can be on a sliding scale if the downsizing is done in steps. The possible expensing will be done under the usual reporting heading for this type of service, but will be allocated to the service provider activity and no longer to the activity shut down.
Unforeseen costs
The possible downsizing costs are expensed under the usual reporting heading for this type of service by the service-providing activity.
IAS 37, par 63 does not allow constitution of provisions covering future operating losses. Unless the obligation to demolish the assets for which the activity is shut down results from a legal or constructive obligation incurred in connection with the restructuring, future demolition costs linked to restructuring or sale of an activity should be recorded under R48690 “Other non-recurring expenses” as they are incurred, without time limit, as long as they are demolitions that were foreseen. Those obligations incurred in connection with the restructuring are part of the restructuring provision.
Possible subsequent and unforeseen demolition costs are allocated to the sector in charge of the business which has shut down its activity, while making the distinction between the two as to whether these costs are considered by the BU to be insignificant or significant.
A social plan is put in place upon the shutdown of an activity. Several workers will be transferred to another business (other division, other SBU) where they will replace workers who will retire or retire early within a relatively short time. For several months there will be some overstaffing of the workforce. However, all workers effectively perform work during the overlap period.
The 2 BU’s agree that the cost of the additional salaries during the overlap period will be charged to the activity shut down.
Absent any obligating event, no provision can be set up to cover the higher than normal level of employee benefit costs, as they are considered as future operational expenses. The costs have to be recognized as expenses, as they are incurred, under R48690 “Other non-recurring expenses” in the company that took over the workers. They are charged to the division shut down, if it still exists. Otherwise they are charged to the division of the company that took over the workers. The use of the R48690 heading is limited to a maximum overlap period of 2 years. Beyond that period the costs are to be considered as current costs of the activity where the workers are employed.
These charges should get the prior approval of the Executive Committee for the total amount recorded under R48690 as well as for the spreading of the costs over a period that will not extend beyond 2 years.