Restructuring Cost

Publication Date :

02 Jan, 2024

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Table Of Contents

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.

The following financial 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

What is Restructuring Cost?

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 products 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 Statement	2017
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.

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 Statement	Restructuring Cost on Balance Sheet	Restructuring 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.	Cash outlays decrease operating activities 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:

Firstly, Rajesh gets a memo that the company will 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 box, the system will automatically know how many, what and when the inventories are received in or delivered from the warehouse. Once these changes are implemented, manual labor hours will be significantly reduced 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 have GPS trackers installed. It will help give the location details of every truck, thereby reducing personal stops and equipment theft. For this entire GPS tracker to be installed on the hardware, software, and labor will cost the company $25,000 per the records collected by Rajesh.
In the final step, Rajesh prepares the financial statements of the company. It will clearly explain the costs involved and in which division cost was incurred. He accurately puts all these expenses incurred by the company for restructuring.

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.