Sapient Corporation is a technology consultancy firm. It focuses on helping clients achieve business outcomes through the rapid application and support of advanced information technology. Most of its contracts are fixed-price, fixed-time agreements. After a decade of success, the firm experienced a significant decline in the demand for its services. Exhibit 6.18 presents a recent income statement for Sapient Corporation. A note to the financial statements stated that (a) "restructuring and other charges" were related to the firm's downsizing of its workforce and operations due to a slowdown in product and service demand, and (b) "impairment of goodwill" was related to the firm's conclusion that the carrying amount of the reporting units represented by the goodwill exceeded their fair values and thus, were written off during Year 2. The firm indicated that the impairment of goodwill did not generate a tax deduction.
Required
a. Discuss whether you would eliminate the restructuring charge from the income statement of Sapient Corporation when using earnings to forecast future profitability.
b. The statement of cash flows for Sapient Corporation (not included here) includes an add back for "restructuring costs" in Year 2 of $7.3 million, but no add back in Year 3. Speculate why in Year 2 the add back differs from the $66,885 million reported on the income statement for restructuring charges in that year.
c. The statement of cash flows (not reported here) includes an add back of $107.43 million for "goodwill impairment" for Year 2. This same amount is reported in Exhibit 6.18 as an expense for Year 2. Explain why the amounts are the same.
d. Restructuring charges often cover a wide range of different cost categories. Identify the categories of costs often included in restructuring charges, and identify those categories that usually entail the use of cash and those that do not.