Analyzing and Interpreting Restructuring Costs and Effects Smith-Burke, Inc., re

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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.

$ 1,908

Using the financial statement effects template, show the effects on financial statements of the (1) 2010 restructuring charge of $1,268 million, and (2) 2010 cash payment of $746 million.

Balance Sheet (in $ millions)

Income Statement

(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 $ -- $ 194 $ (20) $ -- $ 174 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 (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 $ 1,268 $ (746) $ (28)

$ 1,908

Using the financial statement effects template, show the effects on financial statements of the (1) 2010 restructuring charge of $1,268 million, and (2) 2010 cash payment of $746 million.

Balance Sheet (in $ millions)

Transaction Cash Asset + Noncash Assets = Liabilities + Contributed Capital + Earned Capital (1) Answer Answer ? Answer ? (2) ? Answer ? Answer Answer

Income Statement

Revenue - Expenses = Net Income Answer- ? ? Answer Answer Answer

Explanation / Answer

Restructuring charges of 1268 million will be treated as an operating expense when the charge is taken into account. And here since it is not yet paid, it will be recorded as a restricting liability. Therefore, in the balance sheet, it will increase liabilities and reduce earned capital. In the Income statement, it will increase Expenses and reduce net income. Payment of restructuring charges is nothing but mere a cash outflow. Since it is being paid, it will reduce cash assets and liabilities in the balance sheet. In the income statement it will have no impact as restructuring expenses have already been recorded earlier.

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