The process that involves selling and buying of an entity’s assets that comprise of more than the half of the target entity’s consolidated assets is known as Asset Restructuring and it is basically the expenditure for the onetime which is required to be financed by any entity when any restructuring is expected to take place.
Asset Restructuring Meaning
Asset Restructuring is the process of buying or selling of a company’s assets that comprise of far more significant than half of the target company’s consolidated assets. It’s usually a one-time expense that needs to be funded by any company when the restructuring takes place. Asset restructuring is a cost that may occur during the entire process of strategically writing offWriting OffWrite off is the reduction in the value of the assets that were present in the books of accounts of the company on a particular period of time and are recorded as the accounting expense against the payment not received or the losses on the assets. its assets or sometimes shifting the entire production facility to any new location, shutting down the manufacturing facilities, and uniquely laying off all the non-strategic employees.
Very recently, Toshiba announced its plan to split its four in-house companies into wholly-owned subsidiariesWholly-owned SubsidiariesWhen a company’s almost all of the outstanding shares are owned by another company (parent) then it can be said that it is a wholly-owned subsidiary of that company and it is controlled by the parent company. For example, Walt Disney Entertainment owns 100% of Marvel Entertainment which produces movies. signaling that it may completely get out of the business of making nuclear plants.
Several companies have successfully developed the restructuring wings and authorities in many countries. Several MNCs in various nations are keenly involved in this herculean task and are strategically devising the process of asset restructuring.
- Why need asset restructuring?
- Types of Restructuring
- Outcomes of Asset Restructuring
- Key Benefits of Asset Restructuring
- Costs of Asset Restructuring
- Asset Restructuring Charge
- How does Asset Restructuring work?
- Asset Restructuring Example 1
- Asset Restructuring Example 2
- Why is Asset Restructuring Important?
Why need asset restructuring?
Normally, people take a loan from banks while purchasing any immobile property. Several banks lend money to them without making proper background verification of the customers whether they would repay the loan amount with interest within the stipulated period or their creditworthiness. Hence, the chances of the loan going bad increases significantly and thus might harm these financial institutions by increasing their fiscal debts.
Therefore, the concept of asset restructuring developed for checking such frauds and provide appropriate repair if sudden fiscal loss appears. By such actions, several frauds were successfully prevented and uniquely addressed with a significant fall in fraudulent and criminal activities was noticed. Also, multiple lending frauds could even be prevented by a robust asset restructuring mechanism. Several companies are operational on the key project, and the same concept has successfully been implemented across several countries.
Asset restructuring could be implemented due to a variety of reasons including, targeting the organization to become more competitive, successfully survive and emerge stronger from the existing hostile economic environment, or position the company to move towards an entirely new direction.
Types of Restructuring
There’s a wide range of restructuring available, as shown in the diagram below:
Asset restructuring also involves a well-planned sale of intangible or tangible assets of the target company for generating cash.
Restructuring of assets could also take the form of a divestitureDivestitureDivesting refers to the act of partially or entirely selling organizational assets to generate funds urgently. or a well-planned divestment that comprises of the assets sales of the company, or brand, or divisions or product lines to the third party.
It can also be termed as an acquisition in reverse.
Need for Divestment
- Strategic change
- Strategically selling of cash cowsCash CowsA cash cow is a company or a business unit that provides a consistent cash flow stream by capturing significant market share and requires a relatively lower capital investment and maintenance cost. In addition, products generated are standard and have consistent demand with higher returns at a lower risk.
- Unique disposal of non-profitable businesses
- Unlocking attractive value
Sell-off could also be a part of the asset restructuring process, with the company selling a portion of its non-core business to any agreed-upon third-party. It could be considered a normal practice by several huge companies for selling off or divesting their less profitable or non-profitable businesses to avoid any further pressure on its key resources.
Many times the company might trade-off their lucrative but non-essential businesses to generate enough liquidity for continuing with its daily operations profitably.
Outcomes of Asset Restructuring
Apart from the positive and favorable results of this asset restructuring program, there are also certain byproducts of the operation such as a one-time item, which is generally an accounting term in any organization’s income statement, which is believed to be non-recurringNon-recurringNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off. by nature. Further, for getting the right evaluation on any company’s financial performance, one-time elements are normally excluded by investors and analysts while accurately examining any company. One-time elements usually impact any company’s earnings from operations; however, it may sometimes have a healthy impact.
Key Benefits of Asset Restructuring
- Post restructuring of the company’s major non-core and non-profitable assets, its business become attractively integrated and highly profitable. The company mostly hires legal and financial advisors for strategically negotiating and crafting the restructuring plans.
- Asset restructuring must lead to much smoother and highly economic business operations as the selling of non-strategic assets. In turn, purchase of several other significant assets crucial for expanding the business operations is believed to continue to deliver sustainable long-term company growth while offering attractive shareholder returns.
Costs of Asset Restructuring
The process of asset restructuring definitely incurs some costs to the company including, the costs related to the writing off of the assets, minimizing or removing service or product linesProduct LinesProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing., discarding agreements, removing divisions, and shutting down the facilities. Further, purchasing some key property adds to the overall asset restructuring costs.
Asset Restructuring Charge
A one-time expense that needs to be funded by any organization when it goes through asset reorganization or restructuring. The restructuring charge might be incurred while writing off non-core assets or shifting the entire production facility to another location, shutting down the manufacturing facility, and laying off its employees to reduce costs.
Ericsson in Q1 2016 reported SEK 13.4 billion of restructuring costs, asset write-downsWrite-downsWhen the carrying value (purchase price – accumulated depreciation) of an asset exceeds its fair value, it is referred to as a write down. due to which it’s reported a Net loss of SEK 2.1 billion in Q1 2016.
Asset restructuring is a type of operational restructuring where a company’s assets might be strategically bought or sold off. That completely depends on the entire process of expanding the economic feasibility of the core business model. Some examples include abandonment of non-core product lines or sale of non-strategic and non-profitable divisions, well-planned mergers, or cost optimization efforts such as shutting down non-profitable facilities. Asset restructuring is mostly being performed by the companies under major bankruptcy and turnaround situations for saving the business.
How does Asset Restructuring work?
During a key transition, a bankruptcy or a buyout, the management might consider strategic asset restructuring of the company. Asset restructuring might include several measures for eliminating diseconomies of scaleDiseconomies Of ScaleDiseconomies of scale is a state that generally occurs when an enterprise expands in size. The average operating cost increases due to inefficiency in the system, employee incoordination, administration & management issues, and delayed decisions., like streamlining and reorganizing the core operations and the management, consolidating new owners or buyers management teams.
Asset Restructuring might involve new capital, new management, and any new prospect for rethinking the business plan and organization. Fruitful asset restructuring would usually lead to a higher company’s valuation.
Let’s take some examples for getting some clarity on Asset Restructuring:
Asset Restructuring Example 1
Example 1: Assume a bank is having some old furniture and a traditional locker with it, which is of no use to the bank because it could be treated as non-performing assets or NPANPANon-Performing Assets (NPA) refers to the classification of loans and advances on a lender's records (usually banks) that have not received interest or principal payments and are considered "past due." In the majority of cases, debt has been classified as non-performing assets (NPAs) when loan payments have been outstanding for more than 90 days.. Now, the top management of the bank decides to sell it off at some predetermined price. It would allow the bank to get rid of such NPAs while making some money from it, which was already of no use to the bank.
However, one must keep in mind a few points about accounting entries to be made while selling any fixed assetsAny Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. including,
- The recording of depreciation expense of the asset till the date of its sale;
- Removing the accumulated depreciationAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet. and cost of the asset;
- Recording the total amount received;
- Any difference must be recorded as a loss or gain.
Asset Restructuring Example 2
Example 2: Consider a calculator being originally bought for $100 while simultaneously depreciated for straight 5 years in a row by applying the straight-line depreciation methodStraight-line Depreciation MethodStraight Line Depreciation Method is one of the most popular methods of depreciation where the asset uniformly depreciates over its useful life and the cost of the asset is evenly spread over its useful and functional life. and having a salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000. of $0. The ledger entries after 2 years would appear like this:
Product – Calculator Accumulated Depreciation
$100 $20 (yr 1)
$20 (yr 2)
Currently, the decision is to sell the calculator for $80. Further, the entries must be made in the manner that nullifies the accumulated and equipment depreciationEquipment DepreciationDepreciation on Equipment refers to the decremented value of an equipment's cost after deducting salvage value over the life of an equipment. It lowers its resale value. accounts as they would cease to exist after the transaction. Also, one must also consider accounts receivableAccounts ReceivableAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. or cash that is currently available owing to the sale. The journal entries for the same appears as follows:
Dr. Cash $80
Dr. Accumulated Depreciation $40
Cr. Product – Calculator $100
But, these credits and debits don’t match. It can be corrected by introducing another account referred to as Gain (Loss) on the Disposition of Assets or like. A credit entry is treated as a Gain (such as Revenue), and a debit entry treated as a Loss (such as Expense). For this case, a credit entry of $20 is illustrated below:
Dr. Cash $80
Dr. Accumulated Depreciation $40
Cr. Product – Calculator $100
Cr. Gain or Loss on Disposition $20
Hence, credits and debits match!
Now, let’s see the impact on the Cash Flow Statement. We observe that the net value of entire fixed assets would get reduced across the company’s balance sheet Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. (being a cash source), and we have grown the overall cash account. It illustrates the transaction’s cash flows.
Another effect includes the Net Gain (Loss) on asset’s disposition, which is again a non-cash activity that surfaces on the company’s combined income statement, whereas it reduces or surges taxable income. Likewise, Depreciation Expenditure is a non-cash activity that lowers or expands Net Income Before Taxes (NBIT) beyond limits. Finally, the consolidated income statement appears as follows:
Minus Expense $20
Net Profit from Operations $80
Gain or Loss on disposing of the product $20
Net Income before Taxes $82
Net Income $77
In the example above, the company has overstated the net income by a non-cash activity of $20 (whereas depreciation expenditure is believed to lower the net income as it’s a non-cash expenditure). Hence, one must deduct this non-cash activity as depicted on the cash flow statementsCash Flow StatementsA Statement of Cash Flow is an accounting document that tracks the incoming and outgoing cash and cash equivalents from a business. for compensating for the net income’s overstatement. It comes under operating cash flowsOperating Cash FlowsCash flow from Operations is the first of the three parts of the cash flow statement that shows the cash inflows and outflows from core operating business in an accounting year. Operating Activities includes cash received from Sales, cash expenses paid for direct costs as well as payment is done for funding working capital. as associated with depreciation expenditure.
Why is Asset Restructuring Important?
A strategically restructured company, mainly through asset restructuring, is at least tentatively, more profitable, more efficient, and more focused on its operations. But, asset restructuring could impact and might even weaken the existing stockholder’s stock values.
The primary objective of asset restructuring is to improve shareholder valueShareholder ValueShareholder's value is the value that company shareholders receive as dividends and stock price appreciation due to better decision-making by the management that ultimately results in a company's growth in sales and profit..
Besides this, several other reasons include,
- Alterations in a competitive environment
There could be an accelerated change in technology and globally expanding competitive pressures due to huge foreign competition.
The management might decide to go for asset restructuring of the company for keenly focusing on major competencies through strategic divestment of non-core businesses while these attractive disinvestments could deliver impressive valuations.
A Few More Examples…
- AT&T reported significant expansion in its share price after the company’s strategic declaration of firing approximately 40,000 workers post its core profits came under pressure.
- In the early 90s, Daewoo witnessed problems controlling its hugely well-diversified empire. However, by shutting down its non-profitable operations, downsizing and restructuring, it rephrased its achievement story.
Every company does perform certain asset restructuring operations to get rid of its non-performing assets (NPAs) and to improve their financial position while making their balance sheets attractive for the investors. Therefore, through the process of “Asset Restructuring,” companies often avoid making vast piles of non-performing assets while enhancing cash on their balance sheets.