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. These charges are included while calculating the company, but it does not affect the shareholder’s stake since this charge is taken only once in the financial statement.

The following restructuring costs can be taken while calculating RestructuringRestructuringRestructuring is defined as actions an organization takes when facing difficulties due to wrong management decisions or changes in demographic conditions. Therefore, tries to align its business with the current profitable trend by a) restructuring its finances by debt issuance/closures, issuance of new equities, selling assets, or b) organizational restructuring, which includes shifting locations, layoffs, etc.read more charges:

  • Furloughing of employees (Layoffs)Closure of existing manufacturing plantsShifting of company assets to new locationsWriting off or sale of assets;Purchasing of new machinery or equipmentDiversifying business into a new market

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Restructuring Cost (wallstreetmojo.com)

Understanding Restructuring Charge

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, it helps the company in generating 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 productsLine Of ProductsProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more 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.

Concept of Restructuring Charges

Various companies undergo restructuring 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.

Restructuring cost Accounting

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 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.

  • 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 activitiesOperating ActivitiesOperating activities generate the majority of the company’s cash flows since they are directly linked to the company’s core business activities such as sales, distribution, and production.read more when made

Rajesh has decided to take the following steps in maintaining accurate data on the restructuring expenses:

  • Firstly, Rajesh gets a memo that the company will replace the current inventory accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company’s performance and ensuring the smooth operation of the firm.read more 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 softwareAccounting SoftwareWave Accounting Software, Akaunting Software, Slick Pie Accounting Software, GnuCash Accounting Software, xTuplePostBoks Accounting Software, Inv24 Accounting and Inventory Software, and NCH Express Accounts Accounting Software are among the best accounting softwares available.read more 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.

Restructuring Costs – Final Thoughts

Restructuring charges form an integral part of the financial statementsThe Financial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more of the company. However, it has no significant impact on the company’s share price, and neither does it affect the stakeholder’s interests. Analysts carefully inspect any restructuring costs that come up on the income statement to establish whether a company may have charged a recurring expense to the restructuring account.

Restructuring Cost Video

This article has been a guide on Restructuring Costs. Here we discuss restructuring costs, the concept of restructuring charges accounting, and practical examples. To learn more, you may have a look at these suggested articles on advanced accounting –

  • Types of Cost EstimateCapitalization CostProduct Cost vs. Period CostCook the Books