UK mutually agreed Redundancy

[Jay2]

hello all, hope everybody is well.
I have a query .
Manager at work has mutually agreed redundancy package and final day employment will be 31 march 2022.

our financial year is 1/4-31/3

redundancy payments will be spread over two years 2022/23 and 2023/24 (more or less 50/50)

My query is , do i need to recognise these costs in the accounts for this year 2021/22 ? and if so, how ?

or am i fine to recognise half in 2022/23 and then the other half in 2023/24 as my manager has suggested ??

any advice is much appreciated
Jay

 

[StanleyR1]

I can't say definitively, but I would suspect the proper treatment would be to recognize a liability on the balance sheet that gets liquidated over the two years as redundancy payments are made.

 

[Jay2]

I can't say definitively, but I would suspect the proper treatment would be to recognize a liability on the balance sheet that gets liquidated over the two years as redundancy payments are made.

Thank you for time to reply
Jay

 

[Praz Finpoint]

This appears to be a form of restructuring provision - since it has been formalized, agreed and communicated to the employees, the expense and liability is incurred and recorded in 2021/2022. The method and timing of payments has no bearing on when the expense is incurred and should be recorded.

 

[Jay2]

This appears to be a form of restructuring provision - since it has been formalized, agreed and communicated to the employees, the expense and liability is incurred and recorded in 2021/2022. The method and timing of payments has no bearing on when the expense is incurred and should be recorded.

So you think it will need to go in the P&L with immediate effect as a full cost hence reducing profit for 21/22 by the full amount?
rather than it just going on the balance sheet as a liability and then transferring to the P&L over the following two years ?
Thanks for reply by the way , have never had a redundancy before

 

[StanleyR1]

Prax is correct. The payment is expensed when it is made.

 

[Jay2]

Prax is correct. The payment is expensed when it is made.

So let’s say £20k, half paid 22/23, half paid 23/24. You think the £20k needs to be reflected in the P&L as a cost (reducing profit ) in 21/22 . Rather than just showing it as a liability on the balance sheet for 21/22 and nil impact on the profit for this year .
Sorry, I’m just trying to get it clear in my head .
Thanks

 

[Praz Finpoint]

If the redundancy is communicated, committed and agreed with the employees, formally announced and finalized, and the employees are fully entitled to this redundancy package, without having to perform any additional responsibilities, work or services to the Company, to be entitled to and receive the package:

1. The expense and liability is recorded in 21/22
2. Payment is made as and when the Company needs to make the payment

 

[StanleyR1]

Jay,

Sorry for the confusion, but I think we're all on the same page here. (my last comment was unclear and should have said "...when the commitment is made." Praz basically confirmed what I said originally.

The entire redundancy amount will hit your 21/22 P&L. Payment will be made when necessary and will be charged against the liability account.

 

[Jay2]

thanks for your help, have a meeting with our auditors late next week to discuss it and the MD had hoped it would all just get disclosed in the balance sheet 21/22 as a liability owed out, and would hit p+l expenses as and when we made the payments , he can't understand why it would all have to go into 21/22 p+l , his explanation was , well we know we are paying definite rent amounts over the next two years and they just hit the p+l costs as and when the monthly payments occur

 

[Praz Finpoint]

Your MD brings a very good point

So lets discuss the difference

With the monthly Rental expense over 2 years, paid and expensed on a monthly basis. The reason it is expensed on a monthly basis, is because the vendor (being the landlord) has to render a monthly service of making the premises available to the Renter during the 2 years - the Renter will not pay the Landlord if during the month the Landlord breaks their Lease conditions, make the premises unavailable, or restrict occupancy, in which case, the Landlord has not provided their service for the month and Renter has no obligation due to Landlord.

In the above case, of the Redundancy Payment to the Employees, the key question you need to ask is, once the Redundancy Plan and Commitment to Pay has been announced, formalized and committed to the Employees, are the Employees entitled to the Redundancy immediately without any further obligation or service to render to the Company?

I suppose what I am saying is the Redundancy Payment conditional on the Employees staying and working for the Company over the next 2 years? If they leave tomorrow, within 1 month, 6 months, etc. would the Employees still be entitled to and receive the full Redundancy payments? If they are entitled to the amount, then you would need to expense the entire amount in 21/22.

Industry Practice normally, is irrespective of whether the Redundancy Payments is conditional on employee service or responsibilities, the Companies would record the full provision and related expense in the year the plan is formalized and announced.

However the above is a point you and the MD could explain to the Auditors, i.e. if the Redundancy Payment is conditional on the employees staying and working with the Company over the next 2 years, and if they leave during the 2 years, they would not be entitled to the Redundancy or entitled on a pro-rata basis. This could be used as a basis to record the Expense over 2 years on a straight-line basis.

 

[Jay2]

Wow thanks for the detailed reply , much appreciated .
The employees final day is mid March as they have two weeks unused holiday entitlement (our financial year and holiday year is 01/04 - 31/03.
He is then on “gardening leave “ in April whereby still receives a months salary and it is in April when he also gets half his redundancy payment (tax free) , then following April the balance of his redundancy payment (taxes as normal )

 

[StanleyR1]

Remind your MD that you can't record a liability without also recording the related expense. Rent is expensed over time but never appears as liability on the balance sheet.

 

[Praz Finpoint]

Wow thanks for the detailed reply , much appreciated .
The employees final day is mid March as they have two weeks unused holiday entitlement (our financial year and holiday year is 01/04 - 31/03.
He is then on “gardening leave “ in April whereby still receives a months salary and it is in April when he also gets half his redundancy payment (tax free) , then following April the balance of his redundancy payment (taxes as normal )

Based on what you explain here - he is entitled to the redundancy payment irrespective of any service or obligations due to the Company and the payment terms is merely a payment term arrangement for how that the redundancy will be paid out - in my view - its expense in 21/22 then.