Restructuring expense is defined as the cost a company incurs during corporate restructuring. They are considered nonrecurring operating expenses and, if a company is undergoing restructuring, they show up as a line item on the income statement.
The term, restructuring expenses, is also a footnote in the financial statements that describes the details relevant to the restructuring charges. These charges often include cash costs, accrued liabilities, asset write-offs, and employee severance pay due to layoffs. Restructurings may occur during a major reconfiguration of business operations or during a change in upper-level management at a company. One of the most common restructurings of a business is the bankruptcy process. When a business files for bankruptcy, that entire process is a restructuring process and would include expenses for attorneys, financial advisors, trustees and court fees.
Financial statement analysts pay special attention to restructuring charges. This is because they may reflect past or ongoing problems with the company’s business operations or corporate structure. Also, managers have considerable leeway in deciding when to record restructuring charges and what to include in the restructuring charges. Companies then may deliberately report a large restructuring expense to manipulate current earnings. The practice of taking a very large restructuring charge is known as taking a “big bath.” The idea is to take a big hit to earnings in the current period in order to make future period earnings appear more profitable. Big Bath Charges are more common in public corporations than private companies.
Bubba is the chief accountant at a middle market food distribution company. Bubba has worked extremely hard to achieve his title and enjoys his work. Recently, Bubba has been notified by the board of directors of his company that they will restructure in the next quarter of operations. The company tasks Bubba with accounting for this reformation. It is Bubba’s job to make sense of all of the restructuring charges that the company experiences in this quarter.
First, Bubba receives the memo that the company will convert the current inventory accounting system to an electronic, RFID (Radio Frequency Identification) based system. Here, the company places a small tag on each boxed order received from suppliers. This will occur by simply adding a tag to each box, a radio frequency signal emitter at the entrances of the distribution warehouse, and software which works as a go-between to this hardware and the company accounting software. This tag, in operations, will automatically read boxes as they enter and exit the distribution warehouse. Based on the tag placed in each box, the system will know what, how many, and when inventory is received and delivered. Once this change has occurred, the company will greatly reduce man-hours once used for processing inventories. Bubba finds invoices which total in the amount of $45,000.
Next, Bubba is notified that the company trucks will be equipped with a GPS (Global Positioning System) tracking system. This will allow the company to know exactly where every single truck is, reducing personal stops and protecting company equipment from theft. This system, from the records Bubba has collected, will cost the company $25,000 for hardware, software, and labor on installation.
Finally, Bubba prepares company statements. He presents these expenses as incurred, rather than showing a “Big Bath”. This will result in logical financial statements, as well as protecting Bubba’s reputation.
Bubba has completed his project to the satisfaction of the company board of directors. For this project, the board has decided to give Bubba a pay raise due to the quality of his work. It pleases Bubba to hear this. He is happy with how he ended this project.
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