Restructuring charge

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    What is a restructuring charge?

    restructuring charge is a cost incurred by companies when they reorganise their business in some way in order to improve overall efficiency and longer-term profit.

    It is viewed as a short-term expense; necessary to make the company more profitable in the long term.

    How is a restructuring charge incurred?

    This type of charge can often arise when a company needs to make redundancies, close factories or offices, relocate production or write off assets.

    For example, if a company identifies that one of its products is no longer profitable, management may decide that the product should be discontinued. The process involved to follow through on this would mean a certain amount of restructuring or reorganisation, such as an office sell off and redundancies. Redundancies usually mean financial settlements for the staff involved and selling an office is likely to involve estate agency fees; expenses which form part of the overall restructuring charge.

    Restructuring is usually a response to serious financial issues within a company and is seen as a way to help the company recover. A restructuring charge can, however, also be incurred as a result of expansion e.g. stepping up production or diversifying into a new market.

    The costs to be considered with expansion include those associated with recruitment, training, entering a new international sales territory or the purchase of new buildings, equipment or machinery.

    How is a restructuring charge reported?

    A restructuring charge must be reported in the company’s financial statement and included when calculating net income. This often has a detrimental impact on the profit that a company then reports.

    However, because these charges are infrequent (and unlikely to recur in the near future), news of a high restructuring charge is unlikely to have a significant impact on the share price of the company concerned.