ACC7500: Financial Statement Analysis
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RESTRUCTURING CHARGES1
(from Prof. Mark P. Baumann, University of Wisconsin – Milwaukee)
The frequency and magnitude of restructuring charges have made the assessment of companies’
earning power more difficult. This handout is designed to describe the relevant accounting issues
and suggest means to address the problem.
BACKGROUND
Restructuring charges typically result from:
 Consolidation and/or relocation of operations in an effort to change strategic direction or
level of operations
 Abandonment of operations or productive assets not qualifying for treatment as discontinued
operations
 Impairment of carrying value of productive assets
Restructuring charge usually composed of:
 Reduction in carrying value of inventory and/or long-lived assets such as PP&E, patents, or
trademarks (non-cash items)
 Provisions for termination and/or relocation of operations and employees (cash item)
In 1995, Nine West Group Inc. recorded a $51.9 million restructuring charge composed
of: (1) employee severance and termination benefits, (2) write-downs of leasehold
improvements, (3) accruals for lease and other contract terminations, (4) inventory
valuation adjustments, and (5) other costs. Total cash outlays were estimated at $22
million. The summary journal entry was:
Restructuring expense
Leasehold improvements
Inventory
Accrued restructuring liability
51,900
14,620
10,423
26,857
Note: When a restructuring liability is created, subsequent costs are charged against the
liability, not against earnings, as they are incurred.
Financial statement presentation:
 Restructuring charges are generally considered a component of income from continuing
operations (and separately disclosed, if material)
 Restructuring charges should not be preceded by a subtotal that could be construed as
representing “income from continuing operations before restructuring charges”
Adapted from: (1) McConnell and Pegg, “Managing Earnings,” Accounting Issues (September 10, 1996), Bear,
Stearns & Co. Inc., (2) Ciesielski, “Reviewing Restructurings: What the Disclosures Show,” The Analyst’s
Accounting Observer (August 23, 1996), R.G. Associates, Inc., and (3) Stickney and Brown, Financial Reporting
and Statement Analysis: A Strategic Perspective, The Dryden Press (1999).
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ACC7500: Financial Statement Analysis
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If charges relate to activities for which the associated revenues and expenses have
historically been included in “operating income,” they should generally be classified as an
operating expense (and separately disclosed, if material)
If charges relate to activities previously included under “other income and expense,” they
should be similarly classified (and separately disclosed, if material)
American Cyanamid Company recorded a $292 million restructuring which was
allocated among cost of goods sold, selling and advertising expense, research and
development expense, administrative and general expense, interest, royalties and other
income, and equity in net earnings of associated companies.
ACCOUNTING REQUIREMENTS UNDER GAAP
The FASB prescribes the accounting for restructuring liabilities in Emerging Issues Task Force
Consensus No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring).2
Employee Termination Benefits
Record expense (debit) and liability (credit) when:
 Management approves and commits firm to a plan of termination
 Management establishes the benefits that current employees will receive upon termination
 Plan specifically identifies the number of employees to be terminated by job classification or
function and location
 Benefit arrangement is communicated to employees in sufficient detail to enable them to
determine the type and amount of benefit they will receive if terminated
 Period of time to complete the plan indicates significant changes are not likely
Financial statement disclosures required in all periods until plan complete:
 Amount of benefits accrued and charged to expense
 Classification of costs in the income statement
 Number of employees to be terminated
 Description of employee groups to be terminated
 Amount of actual termination benefits paid and charged against the liability
 Number of employees actually terminated as result of plan
 Amount of any adjustment to the liability
2
EITF Consensus No. 94-3 has been in effect since November 17, 1994. Financial statement disclosures prior to that
date are often incomplete.
ACC7500: Financial Statement Analysis
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Costs to Exit an Activity
Record expense (debit) and liability (credit) when:
 Management approves and commits to exit plan
 All significant actions to be taken to complete the exit plan are specifically identified,
including: (1) activities that will not be continued, (2) method of disposition, (3) location of
activities, and (4) expected date of completion
 Period of time to complete exit plan indicates that significant changes to plan are not likely
Financial statement disclosures required if costs recorded at commitment date are material
or the activities that will not be continued are material to the company’s revenues or
operating results:
 Description of major actions comprising the plan, including: (1) activities that will not be
continued, (2) method of disposition, and (3) anticipated date of completion
 Description of type and amount of exit costs recognized as liabilities and the classification of
those costs in the income statement
ANALYTICAL CONSIDERATIONS
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It can be argued that items included in restructuring charges are normal costs incurred by
firms in the long run. Analysts can undo the timing of a charge by (1) removing the after-tax
effects of the charge from net income, and (2) running expenditures through the income
statement in the period they flow through the restructuring liability.
SEC-mandated disclosures are designed to help identify which portion of charge will require
cash and which portion is actually nonrecurring.
Firms employing conservative accounting policies (e.g., short useful lives and immediate
expensing of plant-related expenditures) will have smaller amounts to write off.
Some firms may take restructuring charges for several years in an effort to avoid a large,
single-year earnings hit. Other firms may maximize amount of charge in a given year to
convey all bad news at one time.
If the estimated restructuring charge proves too large (small), income from continuing
operations in a later period will include a correction that increases (decreases) reported
earnings. This provides a means for firms to shift income across periods.
In 1991, Oshkosh B’Gosh Inc. recorded a $5.6 million restructuring charge. In the
following year, it reduced its estimate of restructuring costs “due to the efficient and
orderly winding down of operations and favorable settlement of lease obligations.”
This adjustment increased 1992 pre-tax operating income by $2.8 million.
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Some firms include in restructuring charges costs more appropriately expensed as part of
future operations. This will make future operations appear more profitable. For example,
recording an excessive plant write-down today will reduce depreciation expense in future
years.