Distinguishing restructuring costs from ongoing expenses

On 15 November 2013, management announced its intention to close down its operation in the North of the country and relocate to a new site in the South, primarily to be closer to its key customers. Before the end of the reporting period (31 December 2013) the principal elements of the plan were agreed with employee representatives; a lease signed for a building at the new location; and a notice to vacate the existing facility given to the landlord, all on the basis that production would start at the new location on 31 March 2014 and the existing site would be vacated on 30 April 2014. Production would cease at the existing site on 28 February 2014 to allow plant and equipment to be relocated. Inventory levels would be increased up to that date so that customers could be supplied with goods sent from the Northern facility until 31 March.

Whilst the majority of the 600 existing staff was expected to take redundancy on 28 February 2014, 50 had agreed to accept the entity’s offer of relocation, including an incentive of €3,000 each towards relocation costs. Of those employees taking redundancy, 20 had agreed to continue to work for the entity until 30 June 2014, to dismantle plant and equipment at the Northern site; install it at the new facility in the South; and train new staff on its operation. A bonus of €4,500 per employee would be payable if they remained until 30 June. A further 60 had agreed to stay with the entity until 31 March 2014, to ensure that inventory was sent out to customers before the new site was operational, of which 10 would remain until 30 April 2014 to complete the decommissioning of the Northern facility. These employees would also receive a bonus for staying until the promised date.

The announcement of management’s decision on 15 November 2013 and the fact that the key elements of the plan were understood by employees, customers and the landlord of the Northern site before the end of the reporting period give rise to a constructive obligation that requires a provision to be recognised at 31 December 2013 for the best estimate of the costs of the reorganisation.

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