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Overview
What is restructuring?
Why can (did/does) it cause financial
reporting problems?
The SEC becomes involved
Relevant accounting literature
Restructuring was/is
Restructuring Activities
In the 1980s and 90s the term
Restructuring became one of the major
buzzwords, also known as
getting lean and mean
Purpose: to improve efficiency, restore
international competitiveness, pay for
leveraged buy-outs
Closing plants
laying off employees
moving operations
reorganization of operations (very popular)
cost cutting, cost cutting, cost cutting
Restructuring in Practice
GTE Communications - Telecommunications
($ in Millions)
Annual Sales
$19748
$1,800
$882
Restructuring in Practice
Borden - Food and Non-Consumer Products
($ in Millions)
Annual Sales
$7,142
$642
$(439)
Restructuring in Practice
Woolworth - Merchandise Stores
($ in Millions)
Annual Sales
$9,622
$775
$(495)
Restructuring in Practice
Flagstar Companies, Inc. - Food Services Enterprises
($ in Millions)
Annual Sales
$3,970
$225
$(1720)
SEC Reactions
1993 - Problem identified:
One-line presentations, net of tax
Solution:
SAB 67:
Include charges in continuing operations
No net-of-tax presentation
Restructuring Restatements
Borden to Reverse, Reclassify 40% of 1992 Charge
Reversed $119 million
Canceled projects
Promotion accruals
Reclassified $145 million as marketing expense
Borden spokesman: Truly incremental and related to one-time
advertising and promotional program not occurring in the normal
course of business
Restructuring Restatements
Flagstar Cos. Restated 1993 Financial Results
Reduced reserve by $33 million
Training
Systems development
Future costs to improve image
Costs to be taken as incurred (normal operating expenses)
Restructuring Restatements
Woolworth Restated 1993 Quarterly Results
Reduced repositioning reserve by $217 million
Inventory markdowns
Other normal operating costs
Yes to all
No to any
FASB Statement 88
Special termination benefits
employee accepts
Contractual termination benefits
EITF 94-3
Only costs to exit existing activities
Involuntary employee termination benefits
only if they are not under pre-existing or
ongoing plan
Relocation costs
EITF 94-3
Provisions only appropriate for costs that:
are not associated with future revenue
generations and have no future economic
benefits
I.e., cannot include items such as
advertising, training or system
development
Have an incremental cost of obligation that
existed prior to consummation date
Restructuring Was
90
80
70
60
50
Net Income
40
30
20
10
0
Fiscal Quarter
Restructuring Is
90
80
70
60
50
Net Income
40
30
20
10
0
Fiscal Quarter
Restructuring Was/Is
Restructuring Was
90
80
70
60
50
Net Income
40
30
20
10
0
Restructuring Is
Fiscal Quarter