What is a Restructuring Charge?
A restructuring charge is a one-time cost that companies must pay when reorganizing their operations. Furloughing or laying off employees, closing manufacturing plants and shifting production to a new location are designed to boost profitability, but first require taking a one-off hit, in the form of upfront costs.
- A restructuring charge is a one-time cost that must be paid by a company when it reorganizes its organization.
- It is a short-term expense that is required to make the company profitable in the long run.
- Restructuring charges are usually harmless but can sometimes be manipulated by creative accountants.
Understanding Restructuring Charge
Companies restructure their operations to improve efficiency and boost profit over the long-term. Restructuring charges can occur in a variety of situations, including when a firm makes an acquisition, sells off a subsidiary, downsizes, implements new technology, moves assets to a new location, decreases or consolidates debt, diversifies into a new market and writes off assets.
Whatever its reasons, a restructure is driven by a need for change in the organizational structure or business model of a company. Often, a company that chooses to restructure is 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 money in the short-term, yet is designed to eventually save money in the long run.
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 restructuring charge is unlikely to have a significant impact on the share price of the company.
To find out more details about a restructuring charge, investors can 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 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.
In contrast, Company Z is flourishing. During its rapid growth stage, 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 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 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.