Stock wastage

Illiam

Apologies if this is an obvious question but a friend runs a soapmaking business as a sole trader. Due to illness she has been unable to work at all during the year. As a result a large amount of raw material has become unusable as it is out of date or spoiled. The outcome is that with almost no trading the value of closing stock is considerably less than the value shown as opening stock in the P & L and results in a not insignificant Gross Loss as a result. My question is should the wastage be shown in the P & L in some way or is a note explaining the circumstances sufficient?

CeeJaySix

It IS shown in the P&L - it's in CoS, and you've just stated it has resulted in a significant gross loss being shown.

Are you asking whether it should/can be split out as an exceptional cost on a separate line?

Illiam

Basically yes. Should it be shown as an exceptional cost?

CeeJaySix

I don't work with sole traders, but I believe sole trade accounts must still follow UK GAAP, just no extra CA 2006 requirements.

No need to worry from HMRC perspective as no accounts filed at CoHo, and trading income tax return has no line for exceptionals (and your client may be under VAT threshold therefore using three-line accounts anyway for tax).

Exceptional items are unusual but in the normal course of business and need to be disclosed due to their size. Extraordinary items are rare, abnormal incidents that fall outside the normal course of business.

New UK GAAP does not refer to exceptional items, but material items must have their nature and amount disclosed separately either on the face of the P&L or in the notes, including extra lines on the face of the P&L where relevant to an understanding of financial performance.

New UK GAAP specifically states extraordinary items must be shown on the face of the P&L.

In both cases you can't just call them 'extraordinary/exceptional' any more.

So you need to determine whether it's material, exceptional and/or extraordinary to comply with the letter of the standards.

I assume as you're asking the question the accounts are used for more than just personal records? If so, surely it would be in your friend's interest to show that there's a good reason for the fall in profit, so why look to limit the disclosure?

Illiam

Thanks for the detailed response. She is not VAT registered and completes the simple return to HMRC. Accounts are not published but she has used copies for grants etc in the past and may do so again when she recommences trading so I guess a note explaining the circumstances will be sufficent.