Analyzing and Interpreting Restructuring Costs and Effects Smith-Burke, Inc., re
ID: 2775142 • Letter: A
Question
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:
(a) Which of the following in NOT an example of a common non-cash charge associated with corporate restructuring activities?
Inventory revaluations
Severance paid to employees
Fixed-asset write-downs
Impairment 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.
Balance Sheet (in $ millions)
Income Statement
(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.
(in millions) BalanceOctober 31, 2009 Fiscal year
2010 charges
(reversals) Cash payments Non-cash
settlements
& other adjustments Balance
October 31, 2010 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
Explanation / Answer
Answer (a)
Inventory Revaluations – Inventory revaluations does not result in any cash adjustments as the value of the existing inventory is restated(up or down) at latest prices to arrive at correct costs of acquisition. Hence this is a common non-cash charge
Severance Paid to Employees – This is a cash outflow paid on severance of employees. This is a common cash charge
Fixed Asset write downs - This is restatement of fixed asset values at a lower value. This is a common non-cash charge
Impairment charges on intangible assets – This is related to restatement of intangible assets at a lower level and does not involve any cash adjustment. Hence this is a common non-cash charge.
Based on the above Severance paid to Employees is not an example of common non-cash charge associated with corporate restructuring activities.
Answer (b)
Answer (c)
As the net difference between reversals and cash payments is positive, the overstatement will result in understates expenses and overstates pre-tax income by $ 55 Million. The restructuring liability will be overstated by $ 55 Mllion
Answer (d)
If the severance is paid out in cash in 2011, as the liabilities are overstated by $55 Million in 2010, the cash paid in 2011 will be less than 2010 accruals and the payment will not completed eliminate the liability. Any excess would decrease the profit in 2011 by increasing the expenses.
Balance Sheet Transaction Cash Assets "+" Non-cash Assets "=" Liabilities "+" Contributed Capital "+" Earned Capital Fiscal 2010 acquisitions -20 124 104 Fiscal 2010 ES Plan Severance -85 630 545 Infrastructure 14 14 Fiscal 2009 Plan -177 -5 -182 Fiscal 2008 Infrastructure 8 8 Fiscal 2008 ES Severance -137 -137 Total -419 771 226 104 22