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Friday, December 31, 2010

Extraordinary Items and Prior Year Adjustments

The all-inclusive concept

SSAP was based on the all-inclusive concept whereby the profit and loss account reflected all profits and losses including extraordinary items.

Extraordinary items

Two key definitions:
  • Extraordinary items are material items which derive from events or transactions that are outside the ordinary activities of the company and which are therefore expected not to recur frequently or regularly. They do not include exceptional items nor do they include prior year items merely because they relate to prior year.
  • Ordinary activities are any activities which are usually, frequently or regularly undertaken by the company and any related activities in which the company engages in furtherance of, incidental to, or arising from those activities. They include, but are not confined to, the trading activities of the company.

Exceptional items

Exceptional items are material items which derive from events or transactions that fall within the ordinary activities of the company, and which need to be disclosed separately by virtual of their size or incidence if the financial statements are to give a true and fair view.

Illustrations of usual treatments for exceptional items

Subject to the business and the circumstances of the transaction, the following are example of items which would normally be treated as exceptional:

  • Redundancy costs relating to continuing business segment
  • Reorganization costs unrelated to the discontinuance of a business segment
  • Previously capitalized expenditure on intangible fixed assets written off other than as part of a process of amortisation
  • Amounts transferred to employee share schemes
  • Profits or losses on the disposal of fixed assets
  • Abnormal charges for bad debts and write-offs of stock and work in progress
  • Abnormal provisions for losses on long-term contracts
  • Surpluses arising on the settlement of insurance claims
  • Amounts received in settlement of insurance claims for consequential loss of profits

A business segment is a material and separately identifiable component of the business operations of a company or group whose activities, assets and results can be clearly distinguished from the reminder of the companies activities. A business segment will normally its own separate product lines or markets.

Illustrations of usual treatments for extraordinary items

Subject to the nature of the business and the circumstances of the transaction, the following are examples of items that would normally be treated as extraordinary.

  • The discontinuance of a business segment, either thought termination or disposal
  • The sale of an investment not accurate with the intention of resale, such as investments in subsidiary and associated companies
  • Profits or losses on the disposal of fixed assets
  • Provision made for the payment diminution in value of a fixed assets, because of extraordinary events during the period
  • The expropriation of assets
  • A charge in the basis of taxation or significant charge in government fiscal policy


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