Restructuring ChargeDefined along with Examples
What is a Restructuring Charge?
Business operations are reorganized when a company plans to increase its profitability.
But before a successful reorganization, a company requires a massive restructuring charge.
It is a one-time expense that impacts its business standing as a whole.
Examples of these one-time expenses include the cost of laying off employees, closing business branches or plants, or a change in production operations.
Understanding Restructuring Charge
Reorganization is a long-term strategy that helps companies increase their efficiency and profitability.
However, each time a company restructures, there is a corresponding restructuring cost.
Examples of restructuring practices are acquiring assets, technological advancement, entering into debt consolidations, asset relocation, diversification, or write-off assets.
Most companies undergo restructuring due to the financial instability they are currently experiencing.
With such a situation and based on management analysis, a company’s business model must change.
The management must be ready for expenditures relating to the whole restructuring process before it can even achieve its goal to increase its efficiency rate.
The restructuring charge is a one-time expense, and it is accounted for as a non-recurring operating expense.
It is a line item in the income statement that decreases the net income.
Because it is a non-recurring expense, the shareholder’s equity is unlikely to get affected as well as the company’s share price.
For analysis purposes, a detailed computation and explanation of the accounts and amounts can be seen in the footnotes of the financial statement and the management discussion and analysis (MD&A).
Example of Restructuring Charge
Due to market volatility that affected the financial standing of GEN-Z Company, the management decided to lay off several employees.
As such, the company will incur severance costs to be able to undergo a restructuring process.
The payment made to the laid-off employees is a restructuring cost.
In another situation where GEN-Z Company’s operation has grown rapidly, the company hired an additional workforce to cater to all of its customers.
The related costs of hiring new employees such as signing bonuses and expansion of office space are the restructuring costs.
Special Considerations
The restructuring charges have a significant effect on the income statement and are shown as a decrease in the profit margin and diluting earnings.
Some companies manipulate the restructuring charge by purposely increasing its amount.
The excess amount will be used as a reserve which can be used for other future operating expenses.
Restructuring provision is used by accountants to prevent company losses and to “clean” the books.
The strategy most companies do to be able to receive future period earnings is to report a hefty restructuring charge.
The analyst carefully analyzes the reported restructuring charges to monitor if such accounts are not reported twice in an income statement.
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NYU Stern "In Practice: Dealing with Extraordinary and Other Nonrecurring Expenses" Page 1 . October 10, 2022