70 Understanding the Numbers
bath” and recognize excessive amounts of restructuring costs. The assumption
is that simply increasing a current-period loss will not have additional negative
consequences for share values. Moreover, by writing off costs currently, future
profits are relieved of this burden and will therefore look stronger.
Restructuring charges have attracted the attention of the SEC. Arthur
Levitt, chairman of the SEC, has registered strong objections against the use of
overstated restructuring accruals to increase the earnings of subsequent peri-
ods.^41 The chairman refers to these excessive reserves as “cookie jar” reserves.^42
There has also been some resistance to considering restructuring charges
to be nonrecurring. The very need for restructuring charges indicates that
earnings in previous periods were overstated. Moreover, restructuring charges
commonly recur with some frequency. Note that the Fairchild disclosure in
Exhibit 2.25 reveals a second charge following the initial charge for the re-
structuring of Kaynar Technologies. In some circles restructuring charges are
referred to as “cockroach” charges—from the old saying that if you see one
cockroach there are many more where that one came from.
Restructuring charges will continue to be common in income statements
until the level of restructuring activity in the economy subsides. In the mean-
time, restructuring charges and associated reversals of charges should typically
be treated as nonrecurring, even though they may appear with some repetition.
At some point firms will complete the bulk of their restructuring activities,
and the charges will either disappear or drop to immaterial levels.
The materiality of most restructuring charges is such that it would be dif-
ficult to miss them. In the case of The Fairchild Corporation (Exhibit 2.25),
the restructuring charges were disclosed in at least five separate locations
as follows:
- On a separate line item within the operating income section of the in-
come statement (step one in the nonrecurring items search sequence). - Within the operating activities section of the statement of cash f lows,
with the noncash portion of the charges added back to net earnings or loss
(step 2 in the search sequence). - Disclosed in the section of the MD&A dealing with earnings (step 6 in
the search sequence). - Disclosed in a separate note to the financial statements on restructuring
charges (step 7[d]). - Disclosed in a note dealing with segment reporting (step 7[f] in the
search sequence).
Quarterly and Segmental Financial Data
Quarterly and segmental financial disclosures frequently reveal nonrecurring
items. In the case of segment disclosures, the goal is to aid in the evaluation
of profitability trends by segments. The Fairchild Corporation discussion (Ex-
hibit 2.25) disclosed its restructuring charges in the reports of segment results.