SFAS No. 146 accounting for exit costs and impact on Citigroup

SFAS No. 146 addresses the issue of reporting for costs associated with exit or disposal activities. The statement was issued in response to the rising incidence of firms engaging in disposal activities. These activities represent a liability that needs to be recorded. Pre-existing statements did not address the issue in sufficient depth or clarity (FASB, 2002).

Contrary to the previous statements on this issue, SFAS No. 146 calls for the recognition of a liability when disposal activities are carried out. This liability must be recognized when the disposal is carried out; previously the liability was recognized at the point when the decision to remove the asset was made. The new statement reflects that there may be instances, for example, when such disposals are not carried out or have a different value at the time of disposal than at the time when the decision to make the disposal is made. Fair value is used to value such disposals. In other respects, the statement remains little changed from previous statements regarding disposal -- the timing with respect when the liability is recorded is the most important change brought about by Statement No. 146 (Ibid).

According the Citigroup 2003 Annual Report, the company adopted the statement on January 1, 2003. The annual report states (p. 113) that "The impact of adopting SFAS 146 was not material." This is consistent with the forward-looking nature of the statement. As with many other firms, Citigroup applied the statement as of the adoption date, and therefore did not need to make adjustments to past figures.

The company now outlines the charges that qualify in accordance with SFAS No. 146 in a Structural Expense Review Restructuring Charges. These statements illustrate the amount of the charges. However, the SFAS is more specific as to the timing of the charges. There is no indication in Citigroup's statements nor annual reports that the SFAS has materially impacted its results.

The transition with respect to SFAS No. 146 has been fluid for Citigroup. At best, the company may have delayed the impact of a business exit over the year end of 2002 in order to push the liability to the next fiscal year. Had this been the case, however, the 2003 Annual Report would have made mention of such an impact.

The adoption of SFAS No. 146 is common, and is consistent with Citigroup's commitment to sound accounting principles. The adoption of this statement is unlikely to have a significant impact on corporate strategy. Because the statement mainly affects timing, the most significant impact would have been around the adoption period. It is possible that future layoffs and severance will see an impact with respect to timing, such that the liability is incurred during a particular quarter. This typically would occur during a quarter where the company is already likely to miss its guidance.