Analyzing and Interpreting Restructuring Costs and Effects Smith-Burke, Inc., re
ID: 2420296 • 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:
(in millions)
Balance
October 31, 2009
Fiscal year
2010 charges
(reversals)
Cash payments
Non-cash
settlements
& other adjustments
Balance
October 31, 2010
Fiscal 2010 acquisitions
$ --
$ 94
$ (20)
$ --
$ 74
Fiscal 2010 ES Plan:
Severance
--
630
(55)
45
620
Infrastructure
--
20
(6)
(10)
4
Total 2010 ES Plan
--
650
(61)
35
624
Fiscal 2009 Plan
248
(5)
(177)
(9)
57
Fiscal 2008 SB/EDS Plan:
Severance
747
236
(273)
(35)
675
Infrastructure
419
193
(185)
(19)
408
Total 2008 SB/EDS Plan
1,166
429
(458)
(54)
1,083
Total restructuring plan
$ 1,414
$ 1,168
$ (716)
$ (28)
$ 1,838
(b) Using the financial statement effects template, show the effects on financial statements of the (1) 2010 restructuring charge of $1,168 million, and (2) 2010 cash payment of $716 million.
Balance Sheet (in $ millions)
Transaction
Cash Asset
+
Noncash Assets
=
Liabilities
+
Contributed Capital
+
Earned Capital
(1)
Answer
Answer
Answer
Answer
Answer
(2)
Answer
Answer
Answer
Answer
Answer
Income Statement
Revenue
-
Expenses
=
Net Income
Answer
-
Answer
Answer
Answer
Answer
Answer
(in millions)
Balance
October 31, 2009
Fiscal year
2010 charges
(reversals)
Cash payments
Non-cash
settlements
& other adjustments
Balance
October 31, 2010
Fiscal 2010 acquisitions
$ --
$ 94
$ (20)
$ --
$ 74
Fiscal 2010 ES Plan:
Severance
--
630
(55)
45
620
Infrastructure
--
20
(6)
(10)
4
Total 2010 ES Plan
--
650
(61)
35
624
Fiscal 2009 Plan
248
(5)
(177)
(9)
57
Fiscal 2008 SB/EDS Plan:
Severance
747
236
(273)
(35)
675
Infrastructure
419
193
(185)
(19)
408
Total 2008 SB/EDS Plan
1,166
429
(458)
(54)
1,083
Total restructuring plan
$ 1,414
$ 1,168
$ (716)
$ (28)
$ 1,838
Explanation / Answer
(a) Which of the following in NOT an example of a common non-cash charge associated with corporate restructuring activities?
Answer:(a) Severance paid to employees
(1) How would this overestimation affect financial statements in 2010?
Answer:(c ) (1) Overstates 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?
In 2011, the liability will be reversed when severance costs are actually paid. Because the liability was overestimated in 2010, 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 – The company would show that as a reversal, which must be disclosed in the restructuring footnote.
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