Chapter 12 Special Income and Investment Reporting Issues 539Restructuring Charges. Restructuring chargesare costs incurred with actions such
as canceling contracts, laying off or relocating employees, and combining operations.
Often, these events incur initial one-time costs in order to obtain long-term savings.
For example, terminated employees often receive a one-time termination or severance
benefit at the time of their dismissal. Employee termination benefits are normally the
most significant restructuring charges; thus, they will be the focus of this section.
Employee termination benefits arise when a plan specifying the number of termi-
nated employees, the benefit, and the benefit timing has been authorized by senior
management and communicated to the employees.^3 To illustrate, assume that the man-
agement of Jones Corporation communicates a plan to terminate 200 employees from
the closed manufacturing plant on March 1. The plan calls for a termination benefit of
$5,000 per employee. Once the plan is communicated to employees, they have the legalNet sales $12,350,000
Cost of merchandise sold 5,800,000
Gross profit $ 6,550,000
Operating expenses $3,490,000
Restructuring charge 1,000,000
Loss from asset impairment 750,000 5,240,000
Income from continuing operations before
income tax $ 1,310,000
Income tax expense 620,000
Income from continuing operations $ 690,000
Loss on discontinued operations (net of
applicable income tax benefit of $50,000) 100,000
Income before extraordinary items and cumulative
effect of a change in accounting principle
(net of applicable income tax of $88,000) $ 590,000
Extraordinary item:
Gain on condemnation of land, net of applicable
income tax of $65,000 150,000
Cumulative effect on prior years of changing to a
different depreciation method 92,000
Net income $ 832,000Jones Corporation
Income Statement
For the Year Ended December 31, 2007Exhibit 1
Unusual Items in
Income StatementWhen Is an Asset Impaired?
The asset impairment principle is designed to reduce the sub-
jectivity of timing asset write-downs. That is, write-downs should
occur when the impairment is deemed permanent. In practice,
however, judgment is still needed in determining when such im-
pairment has occurred. Ethical managers will recognize asset
write-downs when they occur, not when it is most convenient.
For example, the SEC investigated Avon Corporationfor
delaying the write-off of a computer software project. In settling
the formal investigation, Avon had to restate its earnings to re-
flect the earlier write-off date.INTEGRITY, OBJECTIVITY, AND ETHICS IN BUSINESS
3 Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Dis-
posal Activities” (Norwalk, CT: Financial Accounting Standards Board, 2002).