Restructuring Cost

Restructuring Cost refers to the one-time expenses or the infrequent expenses which are incurred by the company in the process of reorganizing its business operations with the motive of the overall improvement of the long term profitability and working efficiency of the company and are treated as the non-operating expenses in the financial statements.

What is Restructuring Cost?

Restructuring charge is the cost which is incurred by the company whey they reorganize the operations of the business to improve the overall efficiency and longer-term profit. Restructuring charges are considered as non-operating charges as it is not considered under operating charges and is very infrequent. These charges are included while calculating the company’s, but it does not affect the stake of the shareholder since this charge is taken only one time in the financial statement. It is a short-term expense that is required to make the company profitable in the long run.

The following restructuring costs can be taken while calculating Restructuring charges:

  • Furloughing of employees (Layoffs)
  • Closure of existing manufacturing plants
  • Shifting of company assets to new locations
  • Writing off or sale of assets;
  • Purchasing of new machinery or equipment
  • Diversifying business into a new market
Restructuring-Costs

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For eg:
Source: Restructuring Cost (wallstreetmojo.com)

Understanding Restructuring Charge

A company reorganizes its operations due to various reasons- like merger and acquisition of a company, selling off a unit, or redundancies like financial settlements of the employees who undergo layoffs. This expense is considered under restructuring charge. On the other hand, a company may hire new staff when it decides to expand its operations. The costs associated with hiring new employees, such as giving more bonuses, investing in new office space, also form an integral part of restructuring charges.

Though restructuring charges are expenses to be done, it helps the company in generating profits in the long run. The restructuring charges are nonrecurring operating expenses and are included in the financial statements of the company to calculate net income.

For example, a company with the help of adequate research findings decides that a particular line of productsLine Of ProductsProduct 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.read more that are no longer profitable to the company shall be discontinued. The process which is involved includes restructuring costs on various levels such as lay off of employees, closing down of manufacturing units, or selling of office space. All these expenses are considered under restructuring charges. Again a company may decide to diversify into new sectors, and for that, they need to recruit new staff, implement new R&D units, or purchase new machinery. In this case, all the mentioned costs are to be taken into account for the calculation of restructuring charges.

XYZ Co.’s restructuring costs
XYZ Co.’s Income Statement2017
Revenues$2,10,440
Cost of Goods Sold$1,17,620
Selling general administrative expenses$11,588
Restructuring Charge$74,880
Operating Income$6,352 {2,10,440-(1,17,620+74,880+11,588)}

Concept of Restructuring Charges

Various companies undergo restructuring due to various reasons. The reasons may vary from the acquisition of a new company, selling off a subsidiary unit, layoffs, implementation of new technologies, diversifying into new markets or moving to a new location, etc. A restructure is needed by a company to make financial adjustments to the existing assets and liabilities. Many times a restructuring of costs is done to improve the business and recover from financial losses.

Restructuring charges may cost the company immediately but are beneficial in the long run. This cost is shown as a line item on the income statement. The use of restructuring charges is for the calculation of net income. A restructuring charge will be written in financial analysis as decreasing a company’s operating income and diluted earnings. The restructuring charge is purposely magnified or elaborated to create an expense reserve that can be used to offset ongoing operating expenses.

Restructuring cost Accounting

Restructuring Cost on Income StatementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read moreRestructuring Cost on Balance SheetRestructuring Cost on Cash Flow Statement
  • An operating expense when the charges are taken into account
  • Creates a restructuring liability when the charges are taken into account
  • Non-cash portion increases operating activities when the charges are taken.
  • No expense when future cash outlays are made.
  • Liability is reduced considerably by the amount of cash outlays when made.

Restructuring Cost Example

Rajesh works as the chief accountant in a food logistics company. With extreme hard work and perseverance, he has reached his current position, and he enjoys doing his work. In the recent spate of incidents, the Board of the company instructs him that the company plans to undergo a restructuring schedule in the coming quarter of operations. Rajesh has been asked to handle the accounting data for this restructuring cost. It is Rajesh’s sole responsibility to keep track of the expenses and make sense of all the restructuring expenses that the company is undertaking in that particular quarter.

Rajesh has decided to take the following steps in maintaining accurate data of the restructuring expenses:

Restructuring Costs – Final Thoughts

Restructuring charges form an integral part of the financial statementsThe Financial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more of the company. However, it has no significant impact on the share price of the company, and neither does it affect the stakeholder’s interests. Analysts carefully inspect any restructuring costs that come up on the income statement to establish the fact of whether a company may have charged a recurring expense to the restructuring account.

Restructuring Cost Video

 

This article has been a guide on Restructuring Costs. Here we discuss types of restructuring costs, the concept of restructuring charges accounting along with practical examples. To learn more, you may have a look at these suggested articles on advanced accounting –