According to “NOTIFICATION, NO S.O. 447(E), DATED 28-2-2011 [AS AMENDED BY NOTIFICATION NO.F.NO. 2/6/2008-CL-V, DATED 30-3-2011], the Balance Sheet and Statement of Profit and Loss are to be prepared in revised format from 01/04/2011. Item No. VI of PART II of Schedule VI – Form of Statement of Profit and Loss deals with Exceptional items after ‘Profit before Exceptional and extraordinary items and tax’.
The PART II of the Schedule III of the Companies Act 2013 also has also ditto followed similar presentation for Exceptional Item (Item VI after ‘Profit before Exceptional and extraordinary items and tax’.
SEBI Approach:
Under Clause 41 of SEBI also, there is a provision for disclosure of ‘Exceptional item’ (item 8) before ‘Net Profit / (Loss) from ordinary activities before tax. Thereafter, extraordinary items net of tax expense are disclosed against item 12 after tax expense.
In other words, In SEBI Quarterly Review format, extraordinary items are shown net of tax expense after Net Profit/ (loss) from ordinary activities, after tax expense.
Why this differential approach as regards extraordinary items between the Companies Act (both old and new) and SEBI is unexplainable? Possible because, the SEBI one is for quarterly. Better, SEBI has a relook at it for uniformity in presentation and understanding.
Now, let us look at what is exceptional?
Dictionary meaning of ‘exceptional’ is ‘outstanding or brilliant’. But, the term ‘exceptional’ is neither defined in AS. 5 on “Net Profit or Loss for the Period, Prior period Items & Changes in Account ting Policies” nor In Schedule VI (old Act) nor in Schedule III of the new Act. But, exceptional is not and hence cannot include extraordinary items, since both are distinct items.
Therefore, let us understand what’s extraordinary so that we eliminate the same from exceptional.
Extraordinary items are defined in Para 4.2 of AS 5 -- “Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore, are not expected to recur frequently or regularly.”
Examples of events or transactions that generally give rise to extraordinary items for most enterprises are:
– Attachment of property of the enterprise; or
– An earthquake. These kinds of transactions are not to be exceptional items.
From the above, it’s crystal clear, the above items can’t be bracketed with normal items that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore, are not expected to recur frequently or regularly and hence extraordinary.
If we revert back to exceptional items, as spelt out earlier, the term is neither defined in Revised Schedule VI nor in Schedule III of the Companies Act 2013, though there is a specific line item for exceptional as explained earlier. However, AS-5 on “Net Profit or Loss for the period, Prior period items and changes in Accounting Policies” has a reference to such items in Para 12, 13 and 14’.
For immediate reference, they are reproduced below:
12. When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
13. Although the items of income and expense described in paragraph 12 are not extraordinary items, the nature and amount of such items may be relevant to users of financial statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. Disclosure of such information is sometimes made in the notes to the financial statements.
14.Circumstances which may give rise to the separate disclosure of items of income and expense in accordance with paragraph 12 include:
(a) the write-down of inventories to net realizable value as well as the reversal of such write-downs;
(b) a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring;
(c) disposals of items of fixed assets;
(d) disposals of long-term investments;
(e) legislative changes having retrospective application;
(f) litigation settlements; and
(g) other reversals of provisions.’
From the above, it’s amply clear that the items above mentioned form part of the ordinary activities though may not arise more often than not. But, when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately.
Besides, the Guidance Note of ICICI on Revised Schedule VI vides Para 9.6 on ‘Exceptional items’ also toe the same line hence spoke on the same language. To quote, it runs as follows,
‘The term- ‘Exceptional items’, is not defined in Revised Schedule VI. However, AS-5 on “Net Profit or Loss for the period, Prior period items and changes in Accounting Policies” has a reference to such items in Para 12, 13 and 14’.
From the above, it’s amply clear that though even as on date the term ‘Exceptional item’ is not defined in any of the areas mentioned above, clarity is brought by roping in or focusing on the above said paragraphs in AS. 5 in the Guidance Note referred to above. Until clear cut definition is spelt out in any of the above mentioned areas, there is no other escape route than to rely on Guidance note to refer to Para 12 to 14 of AS.5.
What about SEBI?
Even the plain reading of the existing clauses in Clause 41 as quoted below may warrant a separate disclosure:-
Iv (k) The company shall disclose any event or transaction which occurred during or before the quarter that is material to an understanding of the results for the quarter including but not limited to completion of expansion and diversification programmes, strikes and lock-outs, change in management and change in capital structure. The company shall also disclose similar material events or transactions that take place subsequent to the end of the quarter.
All items of income and expenditure arising out of transactions of exceptional nature shall be disclosed.
A go through of the clauses highlights that they equally rely on Para 12-14 of the AS. 5 and therefore, the approach is the same to decipher exceptional items. Exceptional items are highly judgmental and as a result many companies follow different and inconsistent practices and as result end up in different ballgames. Therefore, it is high time ICICI also rise to the occasion and set well a defined modus operandi to decode to make out Exceptional items so that bone of contentions are eschewed
Further, the different method of presenting extraordinary items in SEBI format as distinct from Part II of Schedule VI/ Schedule III as the case may be, as brought out earlier in the article deserves a well merited revisit for uniform presentation.
Eclipse Of Extraordinary items for IND AS Companies:
We are moving towards IND AS regime from 1/4/2015 as per MCA Notification dated 16/4/2015 initially in respect of companies whose equity or debt securities are listed or are in the process of being listed on any stock exchange in India or outside India and having net worth of rupees five hundred crore or more and in respect of other companies in subsequent years as notified therein.
IND AS 1 prohibits any item to be presented as an extraordinary item, either on the face of the income statement or in the notes, while AS 5 on “Net Profit or Loss for the Period, Prior period Items & Changes in Account ting Policies” specifically requires disclosure of certain items as extraordinary items for companies following the present Indian GAAP. Therefore, it is high time that we bid a goodbye to extraordinary items for companies under INA AS garb. Whether amended version of Schedule II or clarity will be forth coming for IND AS companies?
Since extraordinary items are a taboo for IND AS Companies, how to deal with items mentioned in Para in Para 4.2 of AS 5 mentioned above. Any Guidance is visible in horizon?
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