Restructuring Charge: Definition, Examples, and How It Works

What Is a Restructuring Charge?

A restructuring charge is a one-time expense that a company pays when reorganizing its operations.

Examples of one-time expenses include furloughing or laying off employees, closing manufacturing plants, and shifting production to a new location.

Companies undertake these moves in an effort to boost profitability, but first take a one-off hit in the form of an upfront restructuring charge. The idea is that, once that charge is taken, there should be no other expenses related to the particular reorganization.

Understanding Restructuring Charges

Companies restructure their operations to improve efficiency and boost profitability over the long-term. So, restructuring charges can occur for a variety of reasons.

These include 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.

Whatever the reason, a company restructuring is usually driven by a need for change in the organization or business model. For instance, a company that chooses to restructure is often experiencing significant problems such that it is prepared to stomach certain added costs to improve its fortunes.

Accounting for Restructuring Charges

Restructuring charges are nonrecurring operating expenses that show up as a line item on the income statement and factor into net income.

Because the charge is an unusual or infrequent expense, it is unlikely that it will impact shareholders' stakes in the company. In other words, news of a restructuring charge probably won't significantly impact a company's share price.

To find out more details about a restructuring charge, investors should consult the relevant footnote to the financial statements. Additional information might also be found in the management discussion and analysis (MD&A) section of the financial statement.

Example of a Restructuring Charge

Due to worrisome industry forecasts, Company A has decided to downsize operations. It lays off several employees who each receive severance checks. The severance cost associated with this structural change in the business is a restructuring charge.

In contrast, Company Z is flourishing and growing rapidly. The company decides to hire more employees to keep up with its expansion. The costs associated with hiring new staff, such as signing bonuses and acquiring more office space, are also classified as restructuring charges.

Special Considerations

A restructuring charge will be mentioned in financial analyses as decreasing a company's operating income and diluted earnings. As a result, restructuring charges will often have a significant impact on a company's income statement.

Net income may be manipulated by inflating the amount for a restructuring charge. The charge is purposely exaggerated in order to create an expense reserve that will be used to offset ongoing operating expenses. 

Creative accountants use the restructuring provision to get rid of losses through one-time charges and to clean out the books. 

In effect, a large restructuring charge is reported so the company can take a big hit to earnings in the current period in order to make future period earnings appear more profitable.

Analysts closely scrutinize any restructuring charge that shows up on a company's income statement to see if a company may have charged a recurring expense to its restructuring account.

The Bottom Line

A restructuring charge is a nonrecurring (one-time), upfront charge that a company posts to reflect expenses to be paid when a company reorganizes an aspect of its business. The goal of the restructuring charge (and reorganization) is to eliminate certain future expenses, improve company profitability, and pave the way for long-term financial success.