Restructuring charge definition

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What is a Restructuring Charge?

A restructuring charge is a large one-time write-off taken by a business in contemplation of a reorganization. The charge is taken in advance in order to take a one-time "hit" for the full amount of all expected reorganization costs, after which there should be no additional charges.

Types of Restructuring Charges

There are several types of restructuring charges that a business may take, which include the following:

  • Employee severance benefits. This charge arises when a company lays off employees as part of a restructuring plan. It includes severance pay, benefits continuation, and outplacement services. The expense is recorded when the company commits to the layoffs and notifies the affected employees.

  • Facility closure costs. These charges result from closing or consolidating offices, factories, or warehouses. Costs include lease termination fees, asset write-downs, and relocation expenses. They reflect the business’s effort to downsize or realign its operations for efficiency.

  • Impairment of assets. A restructuring may lead to a reassessment of the value of long-term assets, such as equipment, buildings, or intangible assets. If assets are no longer expected to generate future economic benefits, their carrying amounts are written down. The impairment loss is recognized as part of the restructuring charge.

  • Contract termination costs. These charges apply when a company cancels supplier, service, or customer contracts due to restructuring. Termination fees and penalties are recorded when the decision is made and communicated to the other parties. This ensures future obligations no longer misrepresent the company’s expected operations.

  • Legal and consulting fees. Professional fees related to legal, financial, or strategic advice during a restructuring are included in this category. These services help the company evaluate options, navigate regulatory requirements, and execute the plan. Though essential, these costs are one-time and directly tied to the restructuring effort.

Disadvantages of a Restructuring Charge

Restructuring charges can be taken too far, where the charge is inflated in order to create a "piggy bank" expense reserve that can be used to offset ongoing operating expenses, thereby inflating reported profits. The result can be a spike in a company’s share price.