Analyzing and Interpreting Restructuring Costs and Effects
Smith-Burke, Inc., reports the following footnote disclosure (excerpted) in its 2010 10-K relating to its restructuring programs.
- Fiscal 2010 Acquisitions: On July 1, 2010, SB completed the acquisition of Palm and initiated a plan to restructure the operations of Palm, including severance for Palm employees, contract cancellation costs and other items.
- The total expected cost of the plan is $46 million.
- On April 12, 2010, SB completed the acquisition of 3C. In connection with the acquisition, SB's management approved and initiated a plan to restructure the operation of 3C, including severance costs and costs to vacate duplicative facilities.
- The total expected cost of the plan is $42 million.
- In fiscal 2010, SB recorded restructuring charges of approximately $18 million.
- Fiscal 2010 ES Restructuring Plan: On June 1, 2010, SB's management announced a plan to restructure its enterprise services business. The total expected cost of the plan that will be recorded as restructuring charges is approximately $1.0 billion, including severance costs to eliminate approximately 9,000 positions and infrastructure charges. For fiscal 2010, a restructuring charge of $650 million was recorded primarily related to severance costs. As of October 31, 2010, approximately 2,100 positions have been eliminated.
- Fiscal 2009 Restructuring Plan: In May 2009, SB's management approved and initiated a restructuring plan to structurally change and improve the effectiveness of several businesses. The total expected cost of the plan is $292 million in severance-related costs associated with the planned elimination of approximately 5,000 positions. As of October 31, 2010, approximately 4,200 positions had been eliminated.
- Fiscal 2008 SB/EDS Restructuring Plan: In accordance with the acquisition of EDS on August 26, 2008, SB's management approved and initiated a restructuring plan to combine and align SB's services businesses, eliminate duplicative overhead functions and consolidate and vacate duplicative facilities. The restructuring plan is expected to be implemented over four years at a total expected cost of $3.4 billion.
The adjustments to the accrued restructuring expenses related to all of SB's restructuring plans described above for the twelve months ended October 31, 2010 were as follows:
| Fiscal 2010 acquisitions |
$ -- |
$ 124 |
$ (20) |
$ -- |
$ 104 |
| Fiscal 2010 ES Plan: |
|
|
|
|
|
| Severance |
-- |
630 |
(85) |
45 |
590 |
| Infrastructure |
-- |
20 |
(6) |
(10) |
4 |
| Total 2010 ES Plan |
-- |
650 |
(91) |
35 |
594 |
| Fiscal 2009 Plan |
248 |
(5) |
(177) |
(9) |
57 |
| Fiscal 2008 SB/EDS Plan: |
|
|
|
|
|
| Severance |
747 |
236 |
(373) |
(35) |
575 |
| Infrastructure |
419 |
193 |
(185) |
(19) |
408 |
| Total 2008 SB/EDS Plan |
1,166 |
429 |
(558) |
(54) |
983 |
| Total restructuring plan |
$ 1,414 |
$ 1,198 |
$ (846) |
$ (28) |
$ 1,738 |
(a) Which of the following in NOT an example of a common non-cash charge associated with corporate restructuring activities?
Inventory revaluationsSeverance paid to employeesFixed-asset write-downsImpairment charges on intangible assets
(b) Using the financial statement effects template, show the effects on financial statements of the (1) 2010 restructuring charge of $1,198 million, and (2) 2010 cash payment of $846 million.
(c) Assume that instead of accurately estimating the anticipated restructuring charge in 2010, the company overestimated them by $55 million.
(1) How would this overestimation affect financial statements in 2010?
Overstates the expense and understates pretax income by $55 million. The restructuring liability on the 2010 balance sheet will be overstated by $55 million.Understates the expense and overstates pretax income by $55 million. The restructuring liability on the 2010 balance sheet will be overstated by $55 million.Overstates the expense and understates pretax income by $55 million. The restructuring liability on the 2010 balance sheet will be understated by $55 million.Understates the expense and understates pretax income by $55 million. The restructuring liability on the 2010 balance sheet will be overstated by $55 million.
(2) How would this overestimation affect financial statements in 2011 when severance costs are paid in cash?
The cash paid out in 2011 will be more than the 2010 accrual. Any excess (the $55 million) would increase expense (decrease profit) in 2011.The overestimation from 2010 will have no effect on the 2011 balance sheet or income statement.The cash paid out in 2011 will be less than the 2010 accrual. Any excess (the $55 million) would increase expense (decrease profit) in 2011.The cash paid out in 2011 will be less than the 2010 accrual and the payment would not completely eliminate the liability. Any excess (the $55 million) would reduce expense (increase profit) in 2011.