What is a Restructuring Charge?
A restructuring charge is a one-time expense that a company pays when reorganizing its operations. Examples of one-time expenses include furloughing or laying off employees, closing manufacturing plants or shifting production to a new location. Companies undertake these moves in an effort to boost profitability, but first must take a one-off hit in the form of an upfront restructuring charge.
- A restructuring charge is a one-time cost that a company pays when it reorganizes its business.
- It is a short-term expense the company undertakes with an eye toward boosting long-term profitability.
- Restructuring charges are usually harmless but can sometimes be manipulated by creative accountants.
Understanding Restructuring Charge
Companies restructure operations to improve efficiency and boost profitability over the long-term. Restructuring charges occur for a variety of reasons, including when a company makes an acquisition, sells a subsidiary, downsizes, implements new technology, relocates assets, decreases or consolidates debt, diversifies into a new market or writes off assets.
Whatever the reason, a restructuring is usually driven by a need for change in the organization or business model of a company. A company that chooses to restructure is often experiencing significant problems, so much so that it is prepared to stomach some additional costs to improve its fortunes. A restructuring charge will cost a company in the short-term, yet hopefully will save it money in the long run.
Restructuring fees are nonrecurring operating expenses that show up as a line item on the income statement and factor into net income. Because the charge is an unusual or infrequent expense, it is less likely to impact shareholders' stakes in the company. In other words, news of a restructuring charge is unlikely to significantly impact a company's share price.
To find out more details about a restructuring charge, investors should consult the footnote to the financial statements. Additional information might also be provided in the management discussion and analysis (MD&A) section of the financial statement.
Example of Restructuring Charge
Due to poor industry forecasts, Company A has decided to downsize operations. It lays off several employees who each receive severance checks. The severance cost associated with this structural change in the business is a restructuring charge.
In contrast, Company Z is flourishing and growing rapidly. The company decides to hire more employees to keep up with its expansion. The costs associated with hiring new staff, such as signing bonuses and acquiring more office space, are also classified as restructuring charges.
A restructuring charge will be mentioned in financial analyses as decreasing a company's operating income and diluted earnings. Restructuring charges will often have a significant impact on a company's income statement as a result.
Net income may be manipulated by inflating the amount for a restructuring charge. The charge is purposely exaggerated in order to create an expense reserve that will be used to offset ongoing operating expenses. Creative accountants use the restructuring provision to get rid of losses through one-time charges and to clean out the books.
In effect, a large restructuring charge is reported so the company can take a big hit to earnings in the current period in order to make future period earnings appear more profitable. Analysts closely scrutinize any restructuring charge that shows up on a company's income statement to see if a company may have charged a recurring expense to its restructuring account.