Restructuring is a fact of corporate life. Whether a company is downsizing, exiting a business line, relocating operations, or reorganizing after a merger, restructuring charges can have a material impact on the financial statements. Getting the accounting right matters — not just for compliance, but because restructuring charges are closely scrutinized by analysts, investors, and auditors.
What Are Restructuring Charges?
Restructuring charges are costs associated with a material change in a company's business operations. Under ASC 420, Exit or Disposal Cost Obligations (U.S. GAAP) and IAS 37, Provisions, Contingent Liabilities and Contingent Assets (IFRS), these costs must be recognized when specific criteria are met — not simply when management announces a plan.
The most common types of restructuring charges include:
- Severance and termination benefits — one-time payments to employees being laid off
- Contract termination costs — penalties for breaking leases, supplier contracts, or other agreements
- Asset impairments — write-downs of property, plant, and equipment that will be abandoned or sold
- Facility closure costs — costs to shut down offices, plants, or warehouses
- Relocation expenses — costs to move employees and equipment to new locations
Recognition Criteria Under ASC 420
Under U.S. GAAP, you cannot accrue for a restructuring simply because management "plans" to do it. ASC 420 requires that all of the following conditions be met before recognizing a liability:
- Management commits to a plan: The board of directors or management with appropriate authority has approved a detailed plan that specifies the business being restructured, the location and function of affected employees, and the expected completion date.
- The plan identifies key specifics: The number of employees to be terminated, their job functions, and locations; the expected completion date; and the benefits to be provided must all be specified.
- Actions to implement the plan have begun: The company has started communicating the plan to affected employees, negotiating with unions, or taking other concrete steps.
Until all three conditions are satisfied, restructuring costs are not accrued. This prevents companies from manipulating earnings by over-accruing for "planned" restructurings that may never materialize.
Journal Entry: One-Time Termination Benefits
Severance and termination benefits are typically the largest component of restructuring charges. When a company commits to a plan that meets the ASC 420 recognition criteria, it records the estimated total cost immediately.
Example: ABC Corp announces a restructuring plan on July 3, 2026, committing to pay $500,000 in severance to 25 employees across three departments. All ASC 420 recognition criteria are met.
JE 1 — Accrual of Restructuring Liability (July 3, 2026):
| Dr Restructuring Expense | $500,000 | |
| Cr Restructuring Liability | $500,000 |
Debit: Restructuring Expense (income statement) — this flows through operating expenses and reduces net income in the current period.
Credit: Restructuring Liability (balance sheet) — a current or non-current liability depending on when the payments will be made. If severance is paid over 12 months, classify the portion due within 12 months as current and the remainder as non-current.
Journal Entry: Payment of Severance
When the company actually pays the severance, it reduces the restructuring liability rather than recording additional expense. The expense was already recognized when the liability was established.
Example: ABC Corp pays the first $200,000 of severance to employees in August 2026.
JE 2 — Payment of Restructuring Liability (August 2026):
| Dr Restructuring Liability | $200,000 | |
| Cr Cash | $200,000 |
Journal Entry: Contract Termination Costs
When a restructuring involves breaking leases, canceling supplier contracts, or terminating other agreements, ASC 420 requires recognition of the termination liability at fair value — typically the contractual penalty or the remaining lease payments, whichever is applicable.
Example: As part of the restructuring, ABC Corp vacates a leased office with 18 months remaining on the lease. The landlord agrees to a $90,000 early-termination penalty (six months' rent). The space will not be subleased.
JE 3 — Accrual of Lease Termination Cost:
| Dr Restructuring Expense | $90,000 | |
| Cr Restructuring Liability | $90,000 |
Note: If the lease were classified as an operating lease under ASC 842, the right-of-use asset and lease liability would also need to be derecognized when the space is vacated. The ASC 842 lease accounting standard adds complexity here — see our dedicated guide for the full treatment.
Journal Entry: Asset Impairment in Restructuring
When restructuring involves abandoning or disposing of long-lived assets, those assets must be tested for impairment. The impairment is recorded as part of the restructuring charge. For a deeper dive on impairment mechanics, see our guide on journal entries for impairment loss.
Example: ABC Corp will abandon specialized machinery with a carrying value of $150,000 and accumulated depreciation of $60,000. The fair value less cost to sell is $30,000.
JE 4 — Impairment of Machinery:
| Dr Restructuring Expense — Impairment | $60,000 | |
| Dr Accumulated Depreciation | $60,000 | |
| Cr Machinery (PP&E) | $150,000 |
JE 5 — Write-down to Fair Value:
| Dr Restructuring Expense — Impairment | $60,000 | |
| Cr Accumulated Depreciation | $60,000 |
Calculation: Carrying value = $150,000 - $60,000 = $90,000. Impairment = $90,000 - $30,000 = $60,000. Total impairment recorded is $60,000.
Year-End Adjustments and True-Up
Restructuring liabilities are estimates. Actual costs may differ from the original accrual. At each reporting date, management must reassess the liability and adjust it if circumstances change. If the actual cost turns out to be lower than estimated, the excess liability is reversed through the income statement.
Example: At year-end, ABC Corp determines the actual total severance will be $460,000 — $40,000 less than the original $500,000 estimate.
JE 6 — True-Up Adjustment:
| Dr Restructuring Liability | $40,000 | |
| Cr Restructuring Expense | $40,000 |
This true-up reduces the restructuring expense recognized for the year, increasing reported net income in the adjustment period.
GAAP vs. IFRS: Key Differences
While ASC 420 (U.S. GAAP) and IAS 37 (IFRS) are broadly similar, there are important differences:
| Aspect | ASC 420 (U.S. GAAP) | IAS 37 (IFRS) |
|---|---|---|
| Recognition trigger | Management commits to a plan + communication to affected parties begins | Constructive obligation exists (e.g., detailed formal plan announced) |
| Measurement | Fair value (amount to settle obligation) | Best estimate of expenditure required to settle |
| Onerous contracts | Covered by ASC 420 (contract termination costs) | Separate guidance under IAS 37 for onerous contracts |
| Discounting | Not discounted unless timing is fixed and determinable | Provisions are discounted when the time value of money is material |
Disclosure Requirements
Both GAAP and IFRS require extensive disclosures about restructuring activities. In the footnotes to the financial statements, companies must disclose:
- The nature of the restructuring and the business segments affected
- A reconciliation of the beginning and ending restructuring liability balances
- The total amount of costs incurred and the income statement line items where they appear
- Any significant revisions to prior estimates
- The expected timing of remaining cash outflows
Restructuring charges are often reported as a separate line item on the income statement, particularly when they are material. However, they are classified within operating expenses and are not presented as extraordinary items under current accounting standards.
Practical Tips for Accountants
- Document everything. The recognition criteria under ASC 420 require a formal, approved plan. Board minutes, management memos, and communications to employees are all critical supporting documentation.
- Separate restructuring from ongoing operations. Do not commingle restructuring liabilities with trade payables, regular severance accruals, or other provisions. Use a distinct general ledger account.
- Monitor for triggering events. Restructuring charges related to asset impairments require impairment testing — see our guide on journal entries for goodwill impairment and journal entries for asset disposal.
- True up regularly. At each reporting date, compare the remaining liability to management's updated estimate and adjust as necessary. Failure to do so can result in material misstatements.
- Be aware of the "big bath" risk. Some companies over-accrue restructuring charges in a bad year so they can reverse the excess in a good year, smoothing earnings. Auditors scrutinize restructuring accruals for precisely this reason. See our guide on journal entries for contingent liabilities for related guidance.
Properly accounting for restructuring charges is essential for transparent financial reporting. When in doubt, consult ASC 420 for U.S. GAAP reporters or IAS 37 for IFRS reporters, and work closely with your auditors to ensure all recognition and disclosure requirements are met.
