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Contents
5.2 Small companies – exemptions.
5.2.1 Extract from FRS102: Section 5.1A.
5.3 Presentation of total comprehensive income.
5.3.1 Extract from FRS102: Section 5.2-5.3.
5.3.2.2 Implications of changing between the two layouts.
5.4 Single-statement approach.
5.4.1 Extract from FRS102: Section 5.5-5.6, Section 5.7D and Section 5.9.
5.4.2.2.1 Profit and loss account/income statement.
5.4.2.2.2 Other comprehensive income.
5.4.2.3 Practical application of format 1 showing the single statement approach for group.
5.4.2.3.1 Practical application of single statement approach for an individual entity.
5.5.1 Extract from FRS102: Section 5.7-5.7D and Section 5.9.
5.5.2.2.1 Profit and loss account/income statement formats.
5.5.2.2.2 Other comprehensive income – statement of comprehensive income.
5.5.2.3 Practical application of the two statement approach showing format 1.
5.5.2.3.1 Two statement approach for a Group.
5.5.2.3.2 Two statement approach for an individual entity (i.e. not group accounts).
5.6 Alternative profit and loss format.
5.6.1 Extract from FRS102: Section 5.7B-5.7C.
5.7.1 Extract from FRS102: Section 5.7E-5.7F.
5.7.2.1 Discontinued operation and when it is to be considered to be discontinued.
5.7.2.2 Disclosure requirements for discontinued operations.
5.8 Prior year/period adjustments.
5.8.1 Extract from FRS102: Section 5.8.
5.9 Exceptional items and extraordinary items.
5.9.1 Extract from FRS102: Section 5.9A and Section 5.10-5.10B.
5.9.2.1.1 Exceptional items defined.
5.9.2.1.2 Examples of exceptional items.
5.9.2.1.4 Disclosure requirements of exceptional items in the notes.
5.9.2.1.5 Illustration of disclosure of exceptional items.
5.9.2.1.5.1 Exceptional items shown on face of profit and loss account.
5.9.2.1.5.2 Exceptional items shown in notes and not of the face of profit and loss account.
5.9.2.1.5.3 Exceptional itekm accounting policy disclosure.
5.10.1 Extract from FRS102: Section 5.9B.
5.11.1 Extract from FRS102: Section 5.11.
5.11.2.2 Analysis by function of expense.
5.11.2.2.2 Format 1 Companies Act 2014 – for Republic of Ireland entities.
5.11.2.2.2 Format 1 of Companies Act 2006 – for UK entities.
5.11.2.3 Analysis by nature of expense.
5.11.2.3.1 Format 2 of Companies Act 2006 – for UK entities.
5.11.2.3.2 Format 2 of Companies Act 2014 for Republic of Ireland entities.
5.12.1.2 For UK Parent Company.
5.12.1.3 For Republic of Ireland Parent Company.
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5.9 Exceptional items and extraordinary items
5.9.1 Extract from FRS102: Section 5.9A and Section 5.10-5.10B
5.9A When items included in total comprehensive income are material, an entity shall disclose their nature and amount separately, in the statement of comprehensive income (and in the income statement, if presented) or in the notes.
5.10 An entity applying paragraph 5.5(a),5.5(b), 5.7(a) or 5.7(d) shall not present or describe any items of income or expense as ‘extraordinary items’ in the statement of comprehensive income (or in the income statement, if presented) or in the notes.
Paragraphs 5.10A and 5.10B apply to entities applying paragraphs 5.5(b), 5.5(c) or 5.7(b), 5.7(c).
5.10A Ordinary activities are any activities which are undertaken by a reporting entity as part of its business and such related activities in which the reporting entity engages in furtherance of, incidental to, or arising from, these activities. Ordinary activities include any effects on the reporting entity of any event in the various environments in which it operates, including the political, regulatory, economic and geographical environments, irrespective of the frequency or unusual nature of the events.
5.10B Extraordinary items are material items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activities of the reporting entity and which are not expected to recur. The additional line items required to be presented by paragraph 5.9 and material items required to be disclosed by paragraph 5.9A, are not extraordinary items when they arise from the ordinary activities of the entity. Extraordinary items do not include prior period items merely because they relate to a prior period.
5.9.2 OmniPro comment
5.9.2.1 Exceptional items
5.9.2.1.1 Exceptional items defined
It is clear from Section 5.9A of FRS 102 where unusual items are included in the total comprehensive income that are material they should be appropriately disclosed in the profit and loss. These in effect would be considered to be exceptional items. Disclosure is required of the nature and amount; separating these items on the face of the profit and loss or alternatively disclosing these in the notes. As FRS 102 does not defined an exceptional item, entities should disclose what it considers to be defined as exceptional. See 5.9.2.4
Where an item is a reoccurring item (e.g. fair valuing investment properties year on year) then this is not an exceptional item as it is a transaction in the normal course of business. A consistent approach should be adopted in that an entity cannot only choose to show losses as exceptional items but they also must show gains as exceptional items if they are of a similar nature e.g. reversal of prior year impairments previously disclosed as exceptional.
Gains and losses should not be netted when disclosing the exceptional items, they should be shown separately.
An exceptional item should only be shown on the face of the profit and loss account where it is relevant to the user of financial statements in understanding the results. If it is not it should be disclosed in the notes.
As FRS 102 does not define exceptional items, entities will have to include in a note to the financial statements what they define as exceptional in the notes to the financial statements. See below an example of such a disclosure
Example 6: Exceptional item disclosure note for an accounting policy
Exceptional items
Exceptional items are those that the Directors’ view are required to be separately disclosed by virtue of their size or incidence to enable a full understanding of the Company’s’ financial performance. The Company believe that this presentation provides a more informative analysis as it highlights one off items. Such items may include restructuring, impairment of assets, profit or loss on disposal or termination of operations, litigation settlements, legislative changes and profit or loss on disposal of investments. The company has adopted an income statement format that seeks to highlight significant items within the company results for the year.
5.9.2.1.2 Examples of exceptional items
Materiality can be determined by an item’s size and nature. Example of exceptional items include (as detailed in IAS 1 of IFRS):
- Cost or provision of a major restructuring of operations e.g. a large voluntary and forced redundancies based on the size of the entity
- Profit/loss on disposal of investments
- Impairment/write down of tangible fixed assets
- Impairment of investments
- Impairment of inventories
- Write down on inventories
- Provision for closure costs
- Reversal of prior year impairments or provisions in relation to the above.
- Litigation settlements
- Other reversals of provisions
5.9.2.1.3 Assessing whether to disclose exceptional item in notes or on the face of income statement
Whether an exceptional item is shown on the face of the profit and loss above the operating profit line or not will depend on the method adopted to analyse the costs (i.e. by function or by nature of expense) and the type of exceptional expense. Usually if the expenses are displayed by nature then it is usually unlikely it could be shown above the operating profit line as it would have to be included within the expense that it would fall into. Where there is no overlap it may be appropriate to include it separately above the line e.g. legal provisions etc. Therefore, in this instance a boxed presentation approach should be adopted similar to the function of expense layout as discussed below. As section 5 provides no guidance, an entity will need to use judgement to develop an accounting policy as to what they define as exceptional and when they believe it should be disclosed on the face of the profit and loss account or not. This should be applied consistently.
When a function of expense layout is adopted the exceptional cost should be included within the function to which they relate in the profit and loss above the operating profit and then a boxed presentation can be included on the face of the profit and loss to show within the box, the operating profit before the exceptional item, then detail the exceptional item and then the operating profit after the exceptional item with a reference to a note where full details of the exceptional item is provided. See illustration of this below.
It would also be possible to show operating profit before exceptional item, then show exceptional item to then show the operating profit after the exceptional item instead of using the box approach
As already stated, Sections 5 does not define what is termed an exceptional item. Therefore, judgement will be required and an entity will need to decide on an accounting policy choice as to what it defines as exceptional items and how there are disclosed (i.e. on the face of the profit and loss or in the notes). Therefore, an entity should include its accounting policy for exceptional items in the accounting policies section of the financial statement). See possible disclosure of the accounting policy at 5.9.2.1.5.3.
5.9.2.1.4 Disclosure requirements of exceptional items in the notes.
As per Section 5.9A of FRS 102 a note should be included in the financial statements detailing the nature and reason for the exceptional item as well as the tax effect of this. See further discussion at 5.9.2.1.5.3 an illustration of the disclosures at 5.9.2.1.5
5.9.2.1.5 Illustration of disclosure of exceptional items
See below an example of the way in which exceptional items could be displayed:
5.9.2.1.5.1 Exceptional items shown on face of profit and loss account
| Profit and Loss Account | |||
| For the Year Ended 31 December 2015 | |||
| Notes | 2015 | 2014 | |
| CU | CU | ||
| Turnover | 1 | XXXXX | XXXXX |
| Cost of sales |
(XXXX)
|
(XXXX)
|
|
| Gross profit |
2 |
XXXX | XXXX |
| Selling and distribution costs | (XXX) | (XXX) | |
| Administrative expenses | (XXX) | (XXX) | |
| Other operating income |
XXX
|
XXX
|
|
| Operating profit |
3 |
900,000 |
XXX |
| Operating profit before exceptional item | 1,200,000 | XXX | |
| Impairment of tangible fixed assets | 150,000 | XXX | |
| Restructuring provision | 150,000 | XXX | |
| Operating profit | 900,000 | XXX | |
| Income from shares in group undertakings | 4 | XXX | XXX |
| Income from shares in other financial assets | 5 | XXX | XXX |
| Income from shares in participating interests | 6 | XXX | XXX |
| Profit before interest and taxation | XXXX | XXXX | |
| Interest receivable and similar income | 7 | XXX | XXX |
| Interest payable and similar charges |
8 |
(XXX)
|
(XXX)
|
| Profit before taxation | XXXX | XXXX | |
| Tax on profit | 9 |
(XXX)
|
(XXX)
|
| Profit for the financial year | 1,000,000 | 500,000 |
| Profit for the financial year attributable to: | ||
| Owners of the parent company |
1,000,000
|
500,000
|
| 1,000,000 | 500,000 |
Extract from notes to the financial statements
Exceptional item – impairment charge
| 2015 | 2014 | |
| CU | CU | |
| Restructuring costs (see (i) below) | 8,000 | – |
| Impairment of tangible fixed assets | 8,000 | – |
| Amortisation of deferred grants arising on impairment of related assets |
(500)
|
–
|
| 7,500 | – |
(i) During the year the company announced a formal plan to restructure the operations and as a result announced a plan to let employees go. This amount represents the expected cost of redundancy as a result of this decision.
(ii) The directors have reviewed the carrying value of tangible fixed assets, net of associated deferred grants, at the year end in accordance with Section 27 “Impairment of Assets”. As a result, a net impairment loss of CU150,000 (2014: CUNil) has been charged to the profit and loss account for the year. The impairment of CU150,,000 represents an impairment of tangible fixed assets net of a release of related deferred grants of CU10,000. The impairment losses have been allocated to fixed assets categories on a pro-rata basis relative to their pre-impairment carrying values. The impairment loss arose as a result of the material change in the market in which the company operates. Deferred tax has been recognised as a result of this adjustment.
The company’s activities were considered, due to their nature, to form one income-generating unit for the purposes of the impairment review. A pre-tax discount rate of 6%, representing the estimated market rate of return on an investment with equal risk, was applied to the expected future cash flows in the value in use calculation. Value in use was considered to exceed estimated net realisable value. Cash flows have been projected over five years based on management forecasts and budgets. After that a steady growth rate of 1% has been assumed.
5.9.2.1.5.2 Exceptional items shown in notes and not on the face of profit and loss account
Note where exceptional item not shown on the face of the profit and loss
| Exceptional item | 2015 | 2014 |
| CU | CU | |
| Administrative expenses in the profit and loss account includes the following exceptional charges: | ||
| Provision against investment in subsidiary/joint venture/associate |
XX
|
XX
|
| XX | XX |
Exceptional item
The exceptional item arose as a result of a settlement reached in respect of litigation initiated against the company upon termination of a licence agreement prior to the year end. This amount which includes provision for all legal and other costs relating to the matter which will be borne by the company is also included within accruals and other liabilities in note XX of the financial statements.
| Or Exceptional items | 2015 | 2014 |
| CU | CU | |
| (i) Movement in provision for operating costs to date of closure | XX | XXX |
| (ii) Gain on settlement of pension scheme (see (a) below) |
XX
|
(XXX)
|
| Total | XXX | XXX |
- Following the closure of the company, the defined benefit pension scheme was wound up with effect from 31 December 2015. On wind-up, the pension scheme had sufficient assets to meet the liabilities of the scheme. The gain arose on closure of the scheme.
5.9.2.1.5.3 Exceptional item accounting policy disclosure
See Section 8 at 8.3.2.2.33 for possible discloures
5.9.2.2 Extraordinary items
Section 5.10B of FRS 102 makes it clear that extraordinary items are very rare in practice and it would be very unusual to see these being applied in practice as it is very hard to say anything falls outside of the ordinary activities. An extraordinary item is defined in Section 5.10B of FRS 102 as material items. Items possessing a high degree of abnormality that fall outside of the ordinary course of activities and are not expected to recur. Exceptional items are not extraordinary items.
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Example 1: Example of Single statement approach for a Group.
Example 2: Example of Single statement approach for an individual entity (i.e. not group accounts).
Example 3: Two statement approach for a Group.
Example 3(a): Two statement approach for an individual entity (i.e. not group accounts).
Example 4: Consolidated Statement of Comprehensive/Income statement approach – Alternative Approach.
Example 5: Discontinued operations not ceased.
Example 6: Exceptional item disclosure note for an accounting policy.
Example 7: See below the extract from format 1 of the Companies Act 2006 for the UK.
Example 8 See below the extract from format 1 of the Companies Act 2014 for the Republic of Ireland.
Example 9 See below the extract from format 2 of the Companies Act 2014 for the Republic of Ireland.
Example 10: See below the extract from format 2 of the Companies Act 2006 for the UK.
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