13 December 2013

FRC seeks consistency in the reporting of exceptional items

The Financial Review Reporting Panel (FRRP) of the FRC has identified a significant number of companies that report exceptional items on the face of the income statement and include subtotals to show the profit before such items (sometimes referred to as “underlying profit”). The FRC today reminds boards of what they should consider when they present exceptional or similar items and encourages them to improve reporting in this area.

Many companies present additional line items in the income statement to provide clear and useful information on the trends in the components of their profit in the income statement, as required by IAS 1 “Presentation of financial statements”.  The FRC, however, has identified a number where the disclosure falls short of the consistency and clarity required, with a consequential effect on the profit reported before such items.

The FRRP has considered the relevant principles in the law and IFRS, and has reflected on improvements agreed with companies regarding the provision of information that is relevant to an understanding of trends in components of profit. Based on those considerations, the FRRP believes that, in judging what to include in additional items and underlying profit, companies should have regard to the following:

• The approach taken in identifying additional items that qualify for separate presentation should be even handed between gains and losses, clearly disclosed and applied consistently from one year to the next.  It should also be clearly distinguished from alternative performance measures used by the company that are not intended to be consistent with IFRS principles.

• Gains and losses should not be netted off in arriving at the amount disclosed unless otherwise permitted.

• Where the same category of material items recurs each year and in similar amounts (for example, restructuring costs), companies should consider whether such amounts should be included as part of underlying profit.

• Where significant items of expense are unlikely to be finalised for a number of years or may subsequently be reversed, the income statement effect of such changes should be similarly identified as additional items in subsequent periods and readers should be able to track movements in respect of these items between periods. 
• The tax effect of additional items should be explained.

• Material cash amounts related to additional items should be presented clearly in the cash flow statement.

• Where underlying profit is used in determining executive remuneration or in the definition of loan covenants, companies should take care to disclose clearly the measures used.

• Management commentary on results should be clear on which measures of profit are being commented on and should discuss all significant items which make up the profit determined according to IFRS. 

Press release

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