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 has no effect on the stake of the shareholder since this charge is taken only one time in the financial statement. It is basically 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
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 products 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 it may happen that a company decides 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
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 present 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 and is used 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 Statement||Restructuring Cost on Balance Sheet||Restructuring Cost on Cash Flow Statement|
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, he has been instructed by the Board of the company 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 a track of the expenses and make a 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:
- Firstly Rajesh gets a memo notification that the company is going to replace the current inventory accounting system with an electronic Radio Frequency Identification-based system. In this new system, a small tag will be attached to the boxed orders received from the current suppliers. A radio frequency signal emitter will be there at the entrance of the distribution warehouse along with software that will work as an intermediary to this hardware and the accounting software used by the company. The small tag attached to these boxes will be automatically read as they enter and leave the warehouse. Based on the tag attached to each of the boxes the system will automatically know how many, what and when the inventories are received in the warehouse or delivered from the warehouse. Once these changes are implemented manual labor hours will be significantly reduced involved in these processes. Rajesh finds that the invoices are worth $45,000.
- In the next step, he is informed that all the delivery trucks will be having GPS trackers installed. This will help in giving the location details of each and every truck thereby reducing personal stops and theft of equipment. For this entire GPS tracker to be installed on the hardware, software, and labor for installation will cost the company $25,000 as per the records collected by Rajesh.
- In the final step, Rajesh prepares the financial statements of the company. He is accurate to put all these expenses incurred by the company for restructuring. This will clearly explain what were the costs involved and in which division cost was incurred.
Restructuring Costs – Final Thoughts
Restructuring charges form an integral part of the financial statements of the company though it has no significant impact on the share price of the company and neither does it affect the stakeholder’s interests. Analysts closely 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 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 –