Lesson 18 - Intermediate Accounting Course 

18. Restructuring Costs and Their Impact on Financial Statements

Restructuring costs are expenses incurred by a company when making significant organizational changes, such as layoffs, plant closures, or business model shifts. These costs are recorded as one-time expenses and can significantly impact a company’s profitability and financial statements.

Companies usually restructure to cut costs, improve efficiency, or adapt to new market conditions, but these changes often come with large upfront expenses, which must be accounted for properly.

1️⃣ What Are Restructuring Costs?

Restructuring costs arise when a company decides to fundamentally change its operations. These costs may include:

✔ Employee Severance and Termination Benefits – Compensation for laid-off employees
✔ Facility Shutdown Costs – Expenses related to closing plants, offices, or stores
✔ Contract Termination Costs – Fees for breaking leases or supplier agreements
✔ Asset Write-Downs – Reducing the value of underperforming assets
✔ Legal and Advisory Fees – Costs for consultants, lawyers, and auditors
✔ Reorganization Costs – Expenses linked to mergers, acquisitions, or spin-offs

2️⃣ Why Do Companies Incur Restructuring Costs?

Companies typically restructure due to:

✅ Financial Struggles – Reducing costs to improve profitability
✅ Mergers & Acquisitions – Eliminating duplicate operations
✅ Business Strategy Shifts – Focusing on new markets or product lines
✅ Economic Downturns – Adjusting to reduced demand
✅ Technological Changes – Automating processes to replace manual labor

While restructuring is aimed at long-term improvement, it often leads to short-term financial strain due to high initial costs.

3️⃣ Accounting for Restructuring Costs

📌 Key Accounting Principle:
Restructuring costs must be recognized when the decision is made and a detailed plan exists.

Companies follow these steps:

🔹 Step 1: Identify and Estimate Costs

• Management prepares a detailed plan outlining affected employees, locations, and contracts.
  🔹 Step 2: Record a Liability
  
  

• A liability is recorded when the company has a clear commitment to restructuring.
  🔹 Step 3: Recognize Expenses in the Income Statement
  
  

• Costs are recorded as an operating expense, usually under "Restructuring Charges."
  🔹 Step 4: Adjust Estimates if Needed
  
  

• If restructuring takes multiple years, adjustments may be required.
  
  

4️⃣ Journal Entry for Restructuring Costs

Example: Employee Severance Costs

A company lays off 200 employees and provides $1 million in severance packages.

Journal Entry:

Dr. Restructuring Expense   $1,000,000  

    Cr. Accrued Restructuring Liability   $1,000,000  

This records the expense when the decision is made, even if payments happen later.

When severance payments are made:

Dr. Accrued Restructuring Liability   $1,000,000  

    Cr. Cash   $1,000,000  

5️⃣ Impact on Financial Statements

📊 Income Statement:

• Restructuring costs are recorded as an expense, reducing net income.
  
  

• They are often reported separately under “Restructuring Charges” to highlight one-time impacts.
  
  

📊 Balance Sheet:

• Increases liabilities (if costs are unpaid).
  
  

• Reduces cash (when payments are made).
  
  

📊 Cash Flow Statement:

• Recorded as an operating or financing outflow, depending on the type of cost.
  
  

While restructuring costs hurt short-term profits, they can improve long-term cost efficiency and profitability.

6️⃣ GAAP vs. IFRS Treatment of Restructuring Costs 

While both GAAP and IFRS require companies to recognize restructuring costs when they are committed, IFRS tends to be more flexible in recognizing severance and asset impairments earlier. 

7️⃣ Investor Perspective: How Restructuring Costs Affect Stock Prices

Investors closely watch restructuring costs because they can signal both problems and opportunities:

✔ Positive Impact – If investors believe restructuring will improve efficiency, the stock price may increase.
❌ Negative Impact – If restructuring costs are too high or indicate deeper financial problems, the stock price may drop.

📌 Real Example:
In 2022, Facebook (Meta) announced mass layoffs and office closures, leading to a temporary stock price drop. However, as restructuring reduced long-term costs, the stock recovered and gained value.

8️⃣ Key Takeaways

🔹 Restructuring costs occur when a company reorganizes its business to cut costs or improve efficiency.
🔹 Common expenses include severance, contract terminations, legal fees, and asset write-downs.
🔹 Accounting rules require recognition when a formal plan exists and the company is committed.
🔹 Financial impact: Reduces net income, increases liabilities, and affects cash flow.
🔹 Investor reaction depends on expectations—short-term losses may lead to long-term gains.

Understanding restructuring costs helps investors and analysts evaluate whether a company’s strategy will succeed in the long run.