5 i revenue recognition and operating income 5 18 of

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5 I Revenue Recognition and Operating Income 5-18 of directors before any restructuring charges are accrued. Also, a company must identify 'ant employees and notify them of its plan. In each subsequent year, the company must ..".~ • .... in its footnotes the original amount of the liability (accrual), how much of that liability is in the current period (such as employee payments), how much of the original liability has reversed because of original cost overestimation, any new accruals for unforeseen costs, and 1IIr" rent balance of the liability. This creates more transparent financial statements, which pre- ·et=..::,,_ - deters earnings management. :esEARCH INSIGHT Restructuring Costs and Managerial Incentives ch has investigated the circumstances and effects of restructuring costs. Some research that stock prices increase when a company announces a restructuring as if the market iates the company's candor. Research also finds that many companies that reduce income h restructuring costs later reverse a portion of those costs, resulting in a substantial income for the period of reversal. These reversals often occur when the company would have oth- reported an earnings decline. Whether or not the market responds favorably to trimming fat or simply disregards restructuring costs as transitory and, thus, as uninformative, managers incentives to characterize such income-decreasing items as "one-time" on the income state- and routinely exclude such charges in non-GAAP, pro forma disclosures. These incentives derive from contracts such as debt covenants and managerial bonus plans. cturing costs are typically large and, as such, greatly affect reported profits. Our analysis consider whether these costs are properly chargeable to the accounting period in which they gnized. Following are some guidelines relating to the components of restructuring costs: yee Severance or Relocation Costs and Other Costs GAAP permits recognition relating to employee separation or relocation that are incremental and that do not ben- :;mureperiods. Similarly, other accrued costs must be related to the restructuring and not to ~JeDses that would otherwise have been incurred in the future. Thus, accrual of these costs is like other liability accruals. We must, however, be aware of over- or understated costs eir effect on current and future profitability. GAAP requires a reconciliation of this restruc- _ accrual in future years (see Business Insight on Pfizer's restructuring). A reconciliation either overstatements or understatements: overstatements are followed by a reversal of the turing liability, and understatements are followed by further accruals. Should a company p a reputation for recurring reversals or understatements, its management loses credibility. t Write-downs Asset write-downs accelerate (or catch up) the depreciation process to reflect impairment. Impairment implies the loss of cash-generating capability and, likely, occurs several years. Thus, prior periods' profits are arguably not as high as reported, and the current 's profit is not as low.This measurement error is difficult to estimate and, thus, many analysts
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