04 May 2020
The number and size of exceptional items that will need to be recognised and presented in the profit and loss account due to coronavirus are likely to be substantial.
What does FRS 102 say?
FRS 102 (Paragraphs 5.9A and 1AC.32) requires separate disclosure of the nature and amount of any material items. Materiality can be determined by reference to an item’s size or nature.
Disclosure of such exceptional items eg restructuring provisions, impairments etc. should be made on the face of the profit and loss account by means of additional line items or headings if such presentation is relevant to understanding the entity’s financial performance (FRS 102 paragraph 5.9).
As a result of applying company law formats, an entity is not permitted to present or describe items as extraordinary in the profit and loss account or notes unless they are a banking or insurance company.
In addition, unlike old UK GAAP, there aren’t specific line items for exceptional items, instead they are charged within the line items they relate.
Practical impact and interpretation for preparers
Entities will clearly wish to separately identify and present the financial impact of dealing with coronavirus on their results, however, the options for doing so under FRS 102 are potentially quite limited, especially on the face of the profit and loss account.
When using the “function of expense” format (eg cost of sales, administrative expenses etc), exceptional items should be included within the function to which they relate, and they should not be aggregated under one heading of “exceptional items”.
It is possible to present exceptional items separately on the face of the profit and loss account by:
- a boxed or separate sub-total presentation to present the exceptional items, normal expenses and total for relevant profit and loss account lines;
- including narrative within the heading detailing the value of exceptional items included eg “Administrative expense including exceptional costs of £x”; or
- including three columns that splits each line item between “before exceptional items”, “exceptional items” and “total”.
Exceptional costs like restructuring provisions are likely to split across various expense lines so careful analysis of such costs will be required.
An entity may also have exceptional income, such as income from the Job Retention Scheme and local authority support. Such income will not be turnover and ought to be presented as set out in the article on accounting for the government assistance.
As well as the profit and loss account presentation, a note to the accounts should be included to provide the nature and amount of the total exceptional items. In this note the type of expense in aggregate could be shown eg restructuring costs or write down of tangible fixed assets, and this note could also show the overall impact on the results for the year.
- Consider what profit and loss items are exceptional in respect of coronavirus by reference to their size or nature.
- Analyse the items by the statutory profit and loss line items that are affected and ensure values are kept up to date for any changes to provisions.
- Decide on a profit and loss presentation and supporting notes that would provide users of the accounts with a clear analysis of the impact of coronavirus on their performance during the period.
- Ensure the impact and actions taken described in the narrative reporting ties into the figures presented in the financial statements.