Restructuring Cost

Updated on January 4, 2024
Article bySourav Sinha
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What is Restructuring Cost?

The restructuring charge is the cost incurred by the company when they reorganize the business’s operations to improve the overall efficiency and longer-term profit. It is a short-term expense required to make the company profitable in the long run. Restructuring charges are considered non-operating charges as they are not considered under operating charges and are very infrequent.

Restructuring-Costs

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Source: Restructuring Cost (wallstreetmojo.com)

The following financial restructuring costs can be taken while calculating RestructuringRestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc.read more 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 Cost Video Explanation

 

Restructuring Charge Explained

Restructuring Cost refers to the one-time expenses or the infrequent expenses incurred by the company in 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.

A company reorganizes its operations for 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, and investing in new office space, also form an integral part of restructuring charges.

Though restructuring charges are expenses to be done, they help the company generate profits in the long run. The restructuring charges are non-recurring operating expenses and are included in the company’s financial statements to calculate net income.

For example, with the help of adequate research findings, a company 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 involved restructuring costs on various levels, such as laying off employees, closing down manufacturing units, or selling office space. All these expenses are considered under restructuring charges. Again, a company may decide to diversify into new sectors; 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 considered 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)}

Structure

Understanding the breakdown of financial restructuring costs is crucial for companies navigating organizational changes, allowing for effective planning and budgeting during the restructuring process. Let us understand the structure through the points below.

  • Personnel Costs: Involves expenses related to workforce adjustments, including severance packages, outplacement services, and any additional compensation or benefits provided to employees affected by the restructuring.
  • Facility-Related Costs: Encompasses expenses associated with changes to facilities, such as closures, consolidations, or relocations. This includes costs for lease terminations, moving expenses, and adjustments to facilities to align with the new organizational structure.
  • Asset Write-Downs: This involves recognizing a reduction in the value of assets, such as inventory, equipment, or technology, as a result of the restructuring. This could include impairment charges on assets that are no longer deemed economically viable.
  • Contract Termination Costs: Includes costs associated with terminating contracts or agreements with suppliers, vendors, or other third parties due to the restructuring. This could involve penalties, fees, or settlements to conclude contractual obligations.
  • Legal and Consulting Fees: Encompasses fees incurred for legal services and consulting expertise during the restructuring process. This includes costs related to navigating regulatory requirements, managing negotiations, and ensuring legal compliance throughout the restructuring.
  • Communication and Employee Training: Involves expenses related to communicating the restructuring plan to employees, stakeholders, and the public. Additionally, funds may be allocated for employee training and development programs to support the transition to the new organizational structure.
  • Technology and System Changes: Includes costs associated with implementing new technologies or making adjustments to existing systems to support the restructured operations. This could involve software upgrades, IT consulting, and other technology-related expenses.

Concept of Restructuring Charges

Various companies undergo corporate restructuring costs due to various reasons. The reasons may vary from acquiring a new company, selling off a subsidiary unit, layoffs, implementing new technologies, diversifying into new markets, moving to a new location, etc. A company needs a restructure to make financial adjustments to the existing assets and liabilities. Costs are often restructured 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 the 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.

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Accounting

Now that we understand the basics of financial restructuring costs, let us also discuss the accounting process of this concept through the detailed discussion below.

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.

Example

Now that we understand the basics, accounting, and related factors of corporate restructuring cost, let us now understand the practical application as well through the examples below.

Example #1

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

Rajesh has decided to take the following steps to maintain accurate data on the restructuring expenses:

Example #2

Procter & Gamble (PG) is projecting charges exceeding $2 billion for restructuring and devaluing its Gillette brand, acquired 18 years ago. The consumer goods giant anticipates incurring these charges due to its ongoing restructuring efforts and an impairment charge linked to its shaving business. This move has been expected for a considerable period.

The timing of such write-downs, often classified as goodwill write-downs, is sometimes strategic, frequently occurring during challenging periods to swiftly address them. Despite the current favorable stock market conditions, the company seems keen on addressing these issues, potentially linked to the approaching year-end and quarter-end considerations.

The company’s CFO has also acknowledged that its categories in China may face challenges before witnessing improvement. This echoes a broader trend, with several companies, including Starbucks, expressing concerns about the slower-than-anticipated growth in China.

This article has been a guide to what is Restructuring Charges. Here, we explain its structure, functions, examples, and accounting practices in detail. To learn more, you may have a look at these suggested articles on advanced accounting –