The financial statement effects of restructuring

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The financial statement effects of restructuring charges can be large and frequent. We must ber that management determines the amount of restructuring costs and when to recognize As such, it is not uncommon for a company to time recognition of restructuring costs in a when its income is already depressed. This behavior is referred to as a big bath. $4,500 $4,000 $3,500 (fj § $3,000 E $2,500 w $2,000 $1,500 $1,000 $500 $0 +-------+-------r-----~~----~~----_+------_{ 2005 2006 2007 2008 2009 2010 -.S. GAAP has relatively stringent rules relating to restructuring costs in an effort to mitigate . For example, a company is required to have a formal restructuring plan that is approved by
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5-17 Module 5 I Revenue Recognition and Operating Income RSE 12,070 RSL 9,748 AD 2,322 RSE 12,070 I RSL I 9,748 AD I 2,322 RSL 7,489 Gash 7,489 RSL 7,489 I Cash I 7,489 Pfizer's Restructuring Pfizer explains its restructuring efforts as follows in its 2010 10-K: We have incurred significant costs in connection with our cost-reduction initiatives (several programs initiated since 2005) and our acquisition of Wyeth on October 15, 2009. Since the acquisition of Wyeth, our cost-reduction initiatives that were announced on January 26, 2009 have been incorporated into a comprehensive plan to integrate Wyeth's operations, generate cost savings and capture synergies across the combined company. We are focusing our efforts on achieving an appropriate cost structure for the combined company. The components of restructuring charges associated with all of our cost- reduction initiatives and the acquisition of Wyeth follow: Activity through Decemb~r ~1, 2010 Accrual as of December 31, 2010 Costs Incurred 2005-2010 (Millions of dollars) $ 8,846 2,322 902 $12,070 $6,688 2,322 801 $9,811 $2,158 Employee termination costs . Asset impairments , . Other . Total . 101 $2,259 Financial statement effects of Pfizer's accounting for restructuring costs are illustrated in the fol- lowing template ($ millions). Balance Sheet 2005-2010: Record total restructuring expense and liability -2,322 Accumulated Depreciation +9,748 +12,070 - Restructuring = -12,070 Expense = Restructuring Uability 2005-2010: Paid $7,489 -7,489 cash toward Cash liability -7,489 = Restructuring Liability = The template reflects five years' restructuring transactions. From 2005 to 2010, Pfizer estimated total restructuring costs of $12,070 million and discloses the three usual types of restructuring costs of employee termination, asset impairment, and other. Asset impairments ($2,322 million) do not involve cash. Pfizer shifts the asset cost from the balance sheet to the income statement (by increasing the assets' accumulated depreciation by $2,322 million). Employee termination and other costs will eventually be settled in cash and so Pfizer accrues $9,748 million on its bal- ance sheet as a restructuring liability for those estimated costs (employee termination costs of $8,846 million plus other costs of $902 million). Over the five years, Pfizer pays $7,489 to settle the restructuring liability ($6,688 million + $801 million). GAAP requires disclosure of the initial liability, along with subsequent reductions or reversals of amounts not ultimately used. Pfizer includes the remaining $2,259 million in Other current liabilities ($1.6 billion) and Other noncurrent liabilities ($652 million) on its 2010 balance sheet.
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