Are Restructuring Costs Operating Expenses? | Line-Item Rules

Most restructuring charges sit in operating expenses, unless they’re tied to a discontinued operation or a clearly non-operating item under your reporting rules.

Restructuring costs can make a clean income statement feel messy. One quarter looks “normal,” the next has severance, lease exit costs, and contract terminations stacked on top of each other. The question is simple: do these charges belong in operating expenses?

In most financial statements, the answer is “yes” in practice. Still, the best line item depends on what the costs are, what triggered them, and how your reporting framework wants readers to see the story. This article lays out a clear way to classify restructuring costs without stretching definitions or creating a layout that raises red flags with auditors, regulators, or ad reviewers.

What Counts As A Restructuring Cost

“Restructuring” is a bucket label, not a single cost type. That label can cover a mix of cash and non-cash charges. Some are one-time. Some repeat over several quarters. Some get re-measured as estimates change.

Common restructuring cost types include:

• Employee-related costs like severance, involuntary termination benefits, retention bonuses tied to exit plans, and related payroll taxes.
• Facility exit costs like lease termination penalties, costs to vacate space, and certain ongoing lease costs after a site closes (when required by the accounting model you follow).
• Contract-related costs
• Asset-related charges
• Professional fees

That mix matters because “operating expense” is not a synonym for “one-time.” Operating classification turns on where the cost sits in the business model and where your standards place it, not on whether management expects it to recur.

Are Restructuring Costs Operating Expenses? In Financial Statements

In most cases, restructuring costs land inside operating expenses because they stem from running the business and changing how the business runs. Payroll and facilities are operating inputs. Ending contracts tied to operations is an operating action. Even when the decision is strategic, the cash outflows often relate to operating infrastructure.

Still, you’ll see variation in presentation, because income statements differ across industries and frameworks. Many entities place restructuring charges in one of these spots:

• Separate operating line (e.g., “Restructuring charges”) above operating income.
• Within SG&A when the costs tie to corporate functions, headcount changes, or back-office consolidation.
• Within cost of sales when plant closures, manufacturing headcount changes, or production footprint shifts drive the charge.
• Split across multiple lines when the nature of the cost spans functions, paired with note disclosure that reconciles the total.

Regulators care less about the label and more about whether the placement is faithful, consistent, and not used to “manufacture” a preferred subtotal. For SEC registrants, the staff has addressed presentation around restructuring charges and operating income subtotals in Topic 5 guidance. SEC staff guidance in SAB Topic 5 includes language that speaks to how operating income subtotals should be handled when restructuring charges are classified as operating expenses.

Operating Vs. Non-Operating: The Fast Test That Holds Up

When the line item is unclear, use a plain test that matches how users read statements:

1. Did the cost arise from core activities? If it stems from payroll, facilities, supply chain, or delivery of goods and services, it usually fits operating.
2. Is it tied to financing or investing? Debt extinguishment costs, interest, and certain gains or losses on investments sit outside operating in many formats.
3. Is it tied to a disposal of a business? If it meets the discontinued operations model under your framework, presentation shifts with that model.

This keeps you away from a common trap: treating “non-recurring” as “non-operating.” Those words aren’t interchangeable.

When Restructuring Costs Are Not Operating Expenses

There are real cases where restructuring charges should not sit in operating expenses. The most common ones are:

• Discontinued operations: costs that are part of exiting a component that qualifies for discontinued operations presentation under your standards.
• Directly tied financing actions: fees and losses tied to debt restructuring or refinancing are usually financing-related, not operating.
• Pure investing disposals: some gains and losses tied to selling investments sit outside operating under many income statement layouts.

Even in these cases, the label “restructuring” may still appear in notes, but the statement line should follow the nature of the item.

How GAAP And IFRS Shape The Presentation Choice

Different rule sets can push presentation in different directions. That doesn’t mean one set is “looser.” It means the building blocks differ: what is recognized, when it is recognized, and how totals are presented and explained.

US GAAP: Recognition Guidance Often Comes From Exit And Disposal Models

In US GAAP practice, restructuring and exit costs often tie to the exit or disposal guidance and related literature on termination benefits and contract costs. Large firms publish detailed summaries of how this literature is applied, including what gets recognized when a plan is approved versus when employees are notified or when an obligation is incurred. EY’s technical publication on exit or disposal cost obligations is a useful, detailed overview for the GAAP model and common patterns seen in filings. EY FRD on exit or disposal cost obligations lays out recognition and disclosure themes tied to ASC exit activities.

Presentation under US GAAP can still vary by company, but the key is consistency with your income statement format and a clear note that tells readers where the costs were recorded.

IFRS: IAS 37 And IAS 1 Drive A Lot Of The Practical Output

Under IFRS, restructuring provisions often connect to IAS 37 and how obligations and qualifying costs are defined. The standard’s core page is a solid starting point for the recognition mechanics. IFRS IAS 37 overview summarizes when provisions are recognized and the framework used for measurement and disclosure.

Presentation of expenses in the income statement then ties to IAS 1, which deals with how financial statements are presented, including the structure and classification of expenses. IFRS IAS 1 overview is the anchor page for the presentation framework.

In IFRS statements, you’ll often see restructuring costs shown by function (inside cost of sales or admin expenses) or as a separate line, with notes clarifying the composition. The “right” choice is the one that matches your format and stays consistent across periods, paired with disclosures that let a reader trace totals without guesswork.

Placement Options That Readers Can Follow

Even when everyone agrees the costs are operating, teams still debate the best line item. The goal is not to find the prettiest subtotal. The goal is to make the statement easy to read and the notes easy to tie out.

Option 1: Separate Operating Line Item

This works well when the costs are large enough that combining them into SG&A would blur trends. It also works when the costs span multiple functions and you want one visible line that readers can track each period.

Common label choices include “Restructuring charges” or “Restructuring and related costs.” Keep the label stable from period to period. If the mix changes, explain the mix in the notes instead of renaming the line every quarter.

Option 2: Include Inside SG&A Or Cost Of Sales

This fits when the costs are tightly tied to one function and not so large that a separate line would feel like a spotlight. It also reduces “line bloat” in statements that already have several special items.

If you choose this route, make the note disclosure do more work. The note should state where the costs were recorded and what they include, so a reader can separate baseline operating expense trends from restructuring activity.

Option 3: Split Across Functions With A Total In The Notes

This is common when plant closure costs belong in cost of sales, while corporate severance belongs in SG&A. The drawback is traceability. That’s fixed by a note that shows the total restructuring cost and breaks it down by major category, along with a statement that identifies the income statement lines used.

Done well, this gives a more faithful functional view without making readers hunt through multiple captions.

Decision Matrix For Classifying Common Restructuring Cost Types

The table below gives a practical way to place recurring restructuring cost categories. It’s not a substitute for your reporting framework, but it does match how most preparers keep statements consistent and easy to audit.

Cost Type	Typical Income Statement Placement	Notes That Help Readers
Employee severance and termination benefits	Operating expense (often SG&A or separate restructuring line)	Headcount affected, timing of payments, rollforward of related liability
Facility closure and lease exit costs	Operating expense (separate line or within relevant function)	Sites impacted, lease terms, cash vs non-cash portion, key estimates
Contract termination penalties	Operating expense (often separate line when large)	Type of contracts ended, settlement terms, payment schedule
Impairment of long-lived assets tied to closures	Often operating expense, sometimes separate impairment line	Asset group, method used, triggers, whether cash-generating unit changed
Inventory write-downs linked to footprint changes	Often cost of sales	Reason for write-down, whether tied to obsolescence or exit plans
Relocation and moving costs	Operating expense (SG&A or restructuring line)	Scope of relocation, whether costs are one-time project spend
Advisory, legal, and other execution fees	Operating expense (often restructuring line if material)	Nature of services, time period incurred, link to approved plan
Training or onboarding costs after a reorg	Operating expense (often SG&A)	Whether costs are tied to new roles, systems, or location changes

Operating Income Subtotals And “Before Restructuring” Pitfalls

A common presentation move is to show “Operating income” and then show “Restructuring charges” below it, followed by a second subtotal like “Operating income after restructuring.” That layout can confuse readers because it makes the first “operating income” subtotal look like the official operating result even though operating costs were left out.

Regulatory guidance has warned against presenting an operating income subtotal that excludes restructuring charges when those charges are classified as operating expenses. The SEC staff has addressed this point in its Topic 5 guidance. SEC staff language on operating income and restructuring is worth reading if you prepare SEC-facing statements or want a layout that tracks common filing practice.

If you still want to help readers understand baseline performance, do it in the notes or in management reporting outside the audited statement format, with clear labels and a reconciliation where required by your reporting and regulatory rules.

Cash Flow Statement Treatment: Where It Usually Lands

Cash paid for restructuring is often shown inside operating cash flows, since the payments often relate to operating inputs like payroll and vendor contracts. Still, classification can vary when payments tie to investing actions like disposal of assets, or when cash payments tie to financing actions.

The clean way to handle this is to map cash outflows based on the nature of the payment, then keep your approach stable across periods. If the amounts are large, a short note that separates cash paid for severance, cash paid for facility exits, and cash paid for contract settlements can help readers connect the cash story to the income statement story.

Disclosure That Makes The Classification Credible

When restructuring costs hit, readers want three things: what drove it, what it contains, and where it shows up. You don’t need a long narrative. You need a tight map that removes doubt.

Strong restructuring disclosures often include:

• A plain description of the action: site closures, workforce reduction, product line exit, or supply chain shift.
• A breakdown by major cost category: severance, facility, contract, impairment, other.
• Where the costs were recorded: which income statement lines contain the charges.
• Cash vs non-cash split: what will be paid out and what is already non-cash.
• Liability rollforward: opening balance, new charges, cash payments, reversals, closing balance.

If you follow IFRS and the costs involve provisions, it also helps to tie the disclosure back to the recognition framework under IAS 37 and the presentation framework under IAS 1, since those two standards anchor how provisions are recognized and how expenses are presented. IAS 37 and IAS 1 are the starting points for those rules.

Table: Quick Call Sheet For Common Reporting Scenarios

This table is a fast way to sanity-check how the classification usually shakes out in real reporting packages.

Scenario	Usual Classification	Clean Presentation Move
Corporate headcount reduction across departments	Operating expense	Separate restructuring line or SG&A with clear note mapping
Plant closure with severance and equipment impairment	Operating expense (often split between cost of sales and separate lines)	Split by function, then total and categories in note
Exit from a product line that meets discontinued ops model	Discontinued operations (per your framework)	Keep operating lines clean and explain what sits in discontinued ops
Supplier contract cancellation linked to production footprint change	Operating expense	Include in restructuring line with contract description in note
Debt modification or refinancing fees during a broader reorg	Financing-related (often below operating)	Separate caption tied to debt action, not “restructuring” label

A Simple Checklist Before You Lock The Line Item

Use this checklist to keep the classification steady and defensible:

1. Name the cost type. Severance, facility exit, contract termination, impairment, fees.
2. Link it to the activity. What action created the obligation and when did it become unavoidable under your rules.
3. Pick the statement line that matches the function. SG&A, cost of sales, separate restructuring line, impairment line, or another clear caption.
4. Check subtotal logic. Make sure you’re not showing an “operating income” subtotal that leaves out operating costs.
5. Write the note that ties it all together. Where recorded, what it includes, cash vs non-cash, and rollforward if a liability exists.

When you apply this approach, you get a statement that reads cleanly, compares cleanly across quarters, and avoids the appearance that the company is using labels to steer readers toward a preferred metric.

Practical Takeaways

In most reporting setups, restructuring costs belong in operating expenses because they’re rooted in operating infrastructure like payroll, facilities, and contracts. The cleaner question is not “operating or not,” but “which operating line is the most faithful place?”

If you put the charges in operating expenses, keep the operating subtotal honest. If you split the costs across functions, make the note a clear map. If a portion belongs in discontinued operations or below operating for a non-operating reason, label it based on its nature, not the plan name.

Done this way, the statements stay readable, the disclosures tie out, and the classification feels steady from quarter to quarter.