What Is a Restructuring Charge?

What Is a Restructuring Charge?

Let me explain what a restructuring charge really is—it's a one-time expense that a company has to pay when it's reorganizing its operations.

You see examples like furloughing or laying off employees, closing manufacturing plants, or shifting production to a new location.

Companies do this to boost profitability, but they take that one-off hit upfront as a restructuring charge. The point is, once you take that charge, there shouldn't be any more expenses tied to that specific reorganization.

Key Takeaways

Here's what you need to know: a restructuring charge is that one-time expense when a company reorganizes its business.

It's a short-term cost aimed at improving long-term profitability.

These charges are usually harmless for shareholders, but watch out—they can sometimes be manipulated by creative accountants.

Understanding Restructuring Charges

Companies restructure to improve efficiency and boost profitability over the long haul, so these charges happen for all sorts of reasons.

Think about when a company makes an acquisition, sells a subsidiary, downsizes, implements new technology, relocates assets, decreases or consolidates debt, diversifies into a new market, or writes off assets.

No matter the reason, restructuring usually comes from a need for change in the organization or business model. For example, if a company is facing big problems, it's willing to swallow those added costs to turn things around.

Accounting for Restructuring Charges

These charges are nonrecurring operating expenses that appear as a line item on the income statement and factor into net income.

Since it's an unusual or infrequent expense, it probably won't impact shareholders' stakes much—in other words, don't expect a big hit to the company's share price from news of a restructuring charge.

If you want more details, check the relevant footnote in the financial statements. You might also find additional info in the management discussion and analysis (MD&A) section.

Fast Fact

A restructuring charge costs a company money in the short term, but it should save money in the long run.

Example of a Restructuring Charge

Take Company A, which is dealing with worrisome industry forecasts and decides to downsize. It lays off employees who get severance checks—that severance cost is a restructuring charge.

On the flip side, Company Z is growing fast and hires more employees to keep up, with costs like signing bonuses and more office space—those are also restructuring charges.

Special Considerations

You'll see a restructuring charge mentioned in financial analyses as something that decreases operating income and diluted earnings, so it often has a big impact on the income statement.

Net income can be manipulated by inflating the restructuring charge to create an expense reserve for offsetting ongoing costs.

Creative accountants use this provision to dump losses through one-time charges and clean up the books.

Essentially, they report a large charge to take a big earnings hit now, making future periods look more profitable.

That's why analysts scrutinize these charges on the income statement to check if recurring expenses got charged to the restructuring account.

What Types of Expenses Are Restructuring Charges?

You might encounter charges related to getting a bigger production facility, closing an office building, or paying bonuses to keep high-value employees from jumping to competitors. They could also cover training new hires or buying essential manufacturing equipment.

Are Restructuring Charges Always Made When a Company's in Trouble?

Not always—they happen when a company sees reorganization as necessary for its financial health, for various reasons. For instance, high demand might require adding production space and employees. But they can also come when a slow economy depresses spending, forcing a plant shutdown to save money.

How Big Can a Restructuring Charge Be?

It can be as big or small as the expenses require. For example, in early 2023, Meta announced a $4.2 billion charge for terminating office leases, severance for laid-off workers, and more.

The Bottom Line

A restructuring charge is a one-time, upfront cost that a company records for reorganizing part of its business. The goal is to cut future expenses, improve profitability, and set up for long-term success.