Exceptional Items

PGM

Am I right in thinking large one off quality systems (ISO), can be displayed in the accounts as exceptional items?

In the management accounts they could be displayed after operating profit, but how would they be displayed in the statutory accounts?

thanks in advance.

PGM

From discussion with our auditor, the exceptional item of "quality systems" can't be shown outside of operating profit because it doesn't meet the 3 criteria set down by FRS 3.

One of the criteria is: costs of fundamental reorganisation and restructuring.

Its the interpretation of this I feel could be done in different ways?

slackda

Its a hard one this,


I agree that it is a one off cost and should be shown as an execptional item for the intiatial setup of the ISO, i supose the best way to judge it is a materially basis.

the issue i have is say you have 50k operating profit, before including the iso cost, and prior years have been for example on par with this amount,

so you have :

2008:£50k
2009:£50K
2010:£0K ( Saying that you included as operational Profit not Exeptional)

The Figures don't then give a true comparisson as per one of the framework idea's.


The subsequent years of maintaining the standard would be classed as a normal operation cost.

PGM

Thanks slackda, thats exactly the problem, its really going to skew the profits.

The problem now is the auditors say it doesn't meet the requirement of FRS3, to meet the requirement for 1 of the 3 types of post operating exceptional costs.

slackda

right think it may be down to wording, it doesn't fall under an exceptional item however it does seem to fall under an Extraordinary items and there are no criteria for this.


Extract from FRS3:-
"Extraordinary Items :-
Material Items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activiites of the reporting enetity and which are not expected to recur. They do not include exceptional items nor do the inlcude prior period items merely because they relate to a prior period"

Gill Gittings

I am sure I read somewhere that extraordinary items are now outlawed. I think we can only have exceptional items. I can't recall where I read it but I am 99.9 % sure they aren't allowed. In fact thinking about it I didn't read it I heard it on a recent course.

PGM

slackda wrote: »

right think it may be down to wording, it doesn't fall under an exceptional item however it does seem to fall under an Extraordinary items and there are no criteria for this.


Extract from FRS3:-
"Extraordinary Items :-
Material Items possessing a high degree of abnormality which arise from events or transactions that fall outside the ordinary activiites of the reporting enetity and which are not expected to recur. They do not include exceptional items nor do the inlcude prior period items merely because they relate to a prior period"

Gill Gittings wrote: »

I am sure I read somewhere that extraordinary items are now outlawed. I think we can only have exceptional items. I can't recall where I read it but I am 99.9 % sure they aren't allowed. In fact thinking about it I didn't read it I heard it on a recent course.

Extraordinary items can no longer be listed as such. Its exceptional items that can still be listed.

The two are often mixed up, but they both have their own rules and had been treated differently.

slackda

seems that is is an ordinary item

Quote:
"UK GAAP has had an effective prohibition on extraordinary
items for many years which is achieved by defining ‘ordinary activities’ so
broadly that it is not possible to envisage a company undertaking any other
activities."

PGM

slackda wrote: »

seems that is is an ordinary item

Quote:
"UK GAAP has had an effective prohibition on extraordinary
items for many years which is achieved by defining ‘ordinary activities’ so
broadly that it is not possible to envisage a company undertaking any other
activities."

They haven't prohibited exceptional items.

slackda

mmmm yeah but going on what you auditor said, it makes it an ordinary item however.

Frs3 Extract:
"marterial items which derive from events or transactions that fall within the ordinary activites of the reporting entity and whihc individually or if of a similar type in aggregate, need to be disclosed by virtue of their size or incidence if the financial statements are to give a true and fair veiw"

Therefor Easily comes as exceptional item imo

Steve Collings

I very recently had this question asked of me by a delegate on a lecture I was presenting!

I think the confusion here is in relation to the three criteria set out in FRS 3 concerning 'exceptional items' which are:

1. Profits/losses on the sale or termination of an operation.
2. Costs of fundamental reorganisation/restructuring.
3. Profits/losses on disposal of fixed assets.

In PGMs case, the ISO quality system (assuming correctly written off to P&L) would not fall into one of the above three categories. I think if you look to FRS 3 at paragraph 19 it states that all exceptional items, other than the 3 above, should be shown in the statutory financial statements under the headings used in arriving at operating profit to which they relate e.g. cost of sales and administrative expenses. However, it should be shown separately, either on the face of the P&L account or by way of note to the accounts, if this treatment is considered necessary to give a true and fair view. This, of course, would all determine on the materiality of the transaction.

If your auditors consider it unnecessary to disclose separately as an exceptional item, then they clearly know the file better than anyone on here. However, if you (or should I say the directors) consider the matter an 'exceptional' item and disclosing this separately on th face of the P&L, or in the notes to the statutory accounts would give a true and fair view, then do so and revisit the issue at the time of your audit.

Regards
Steve

PGM

Thanks for the reply Steve.

They have said the ISO costs should be highlighted and discussed in the notes. But because in their view, it doesn't meet any of the 3 criteria you mention, that it must be displayed within operating costs.

If it met on of the criteria it could be displayed after operating profit.

I wonder if they are edging on the side of caution, or maybe they don't understand the effect the quality systems have had on the company. Its meant a major change to systems and procedures.

I believe it should me: 2. Costs of fundamental reorganisation.

What sort of examples would meet this criteria?

Steve Collings

This is one of those "grey areas"!!

The problem in FRS 3 is that it does not specifically identify a fundamental reorganisation! It merely states that it should have:

"a material effect on the nature and focus of the reporting entity's operations."

The 'nature and focus' test is covered in FRS 3 and states:

"the nature and focus of a reporting entity's operations refer to the positioning of its products or services in their markets including the aspects of both quality and location."

I think FRS 3 gives an example of a hotel company which catered for the lower end of the market, then sold its existing chain and bought a luxury chain of hotels. In this example the hotel still remains in the same business of managing hotels but is changing the nature and focus of its operations.

I don't think in your case (in the absence of any further information) the ISO system will fundamentally change the nature and focus of your business insofar of the system going to the root of the operations and materially affecting the nature and focus of them.

Hope that helps.

Regards
Steve

PGM

Thats very helpfull Steve, much appreciated. Very handy having someone so knowledgable on here!

cheers
Paul