What is a Restructuring Charge
A restructuring charge is a one-time cost that must be paid by a company when it reorganizes its organization. The charge might be incurred in the process of furloughing or laying off employees, closing manufacturing plants, shifting production to a new location or writing off assets.
BREAKING DOWN Restructuring Charge
Companies undergo restructures for a variety of reasons — to acquire another company, sell off a subsidiary, downsize, implement new technology, move assets to a new location, decrease or consolidate debt, diversify into a new market, write off assets, etc. Whatever its reasons, a restructure is driven by a need for change in the organizational structure or business model of a company, and/or it can be driven by the necessity to make financial adjustments to its assets and liabilities. Often, a company that chooses to restructure is experiencing significant problems, and restructuring is an attempt to improve the business and recover financially.
For example, due to poor industry forecasts, a company has decided to downsize its operations. To do so, it lays off several employees who each receive severance checks as compensation. The severance cost associated with such a structural change in the business is a restructuring charge. On the other hand, a company in a rapid growth stage might decide to hire more employees to keep up with its expansion. The costs associated with hiring labor, such as signing bonuses and acquiring more office space, would also be called restructuring charges.
A restructuring charge will cost a company money in the short run, but it is meant to save the company money in the long run. The restructuring fees are nonrecurring operating expenses, which show up as a line item on the income statement and are used to calculate net income. Since the charge is classified as an unusual and infrequent expense, it is less likely to affect shareholders’ stakes in the firm. In other words, news of a high restructuring charge is unlikely to have a significant impact on the share price of the company. The restructuring expenses are also included in the footnote to the financial statements, describing the details relevant to the restructuring charges. The management discussion and analysis (MD&A) section of the financial statement may also provide more details on any restructuring charges incurred.
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 effect on a company's income statement as a result.
Net income may be manipulated by inflating the amount for the 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 that the company can take a big hit to earnings in the current period so as 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.