Restructuring.ppt

Restructuring (Part of the earnings management bag of tricks) 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 1980’s and 90’s 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 Restructuring consists of all or some of the following: Closing plants laying off employees moving operations reorganization of operations (very popular) cost cutting, cost cutting, cost cutting Why can (did/does) it cause financial reporting problems? Restructuring is perceived to be good All costs even remotely (or sometimes not at all) associated with restructuring were reported as a separate line item (net of tax) on the income statement (making it look like an extraordinary event) In some cases “restructuring” occurred year after year Restructuring in Practice Restructuring in Practice Restructuring in Practice Restructuring in Practice SEC Reactions 1993 - Problem identified: One-line presentations, net of tax Solution: SAB 67: Include charges in continuing operations No net-of-tax presentation Warning and comment letters Mandatory restatements SEC Warning Letters:“SEC wants explanation from firms planning to post restructuring losses” (WSJ, 2/25/94) Sent to 84 registrants that announced restructurings “Reminder” of specific 10K requirements: Footnotes Circumstances; material elements; asset write-offs vs future cash outflows MDA Current an expected effects future progress and changes Restatements Mandated by SEC Examples: Borden Flagstar Woolworth Restructuring Restatements Restructuring Restatements Restructuring Restatements Relevant Accounting Standards Employee Termination Benefits: FAS 112; 43; 5; and 88 Other restructuring costs: APB 30; FAS 5 EITF 94-3 FASB Statement 112: