What are Restructuring Charges?
A restructuring charge is a one-time expense that a company pays when it reorganizes. Companies consider restructuring charges to be a type of sacrifice, as they pay expenses upfront in the hope that they will make the business more profitable.
In other words, restructuring charges are a short-term expense that companies pay in return for long-term profits.
A company can restructure for positive reasons, such as increased product demand. Or it can do so for negative reasons, such as an economic downturn.
Restructuring can be the result of:
- An acquisition
- Diversification into new markets
- New technology
Restructuring charges are all of the expenses that go towards changing a company’s business model. These expenses are usually a fix for large, systemic problems that, once addressed, will hopefully improve the company.
How restructuring charges work
You’ll see restructuring charges as a one-time expense on a company’s income statement as operating income. As restructuring charges are a one-time event, they’re unlikely to affect the company’s stock prices or shareholder returns.
However, because restructuring charges affect operating income, they can still have a significant impact on the company’s income statement in the present.
To address this, some accounting departments will normalize these charges to more accurately reflect the business’s profitability. An accountant can offset operating expenses by inflating the restructuring charges. This will change the company’s net income and offset operating expenses, keeping the books clean.
If you’re looking at a company’s income statement without normalized restructuring charges, keep in mind that these charges are temporary. They’re non-operating expenses that can temporarily affect forecasts for a business’s future potential, so be sure to look at historical performance for a more accurate number.
Types of restructuring charges
Most of us think about restructuring in a negative way. However, it can happen for many reasons.
For example, if a company needs to lay people off, it can count severance checks as a restructuring expense. Or, if a company is growing quickly and it needs to pay for a bigger office space, it can count that new retail space as a restructuring charge.
Whether it’s growing or shrinking, restructuring charges can help a business to make necessary adjustments to stay profitable. Depending on the situation, a company can count several expenses as restructuring charges, including:
- Closing or moving a manufacturing plant
- Paying severance to laid-off employees
- Installing new machinery or equipment
- Paying fees to end vendors’ contracts early
- Hiring and training new employees
- Doling out performance bonuses to retain top talent
- Expanding to a new office space
During the restructuring, a company’s accountant will total up all of the charges associated with the new changes. They’ll use the total of all the charges and declare them on the company’s income statement.
The goal of restructuring costs is to improve a business and prevent other costs down the line. These expenses may be a sacrifice in the present, but they can pave the way to a better future for the company.