Exceptional and Extraordinary Items under AS and Ind AS

Exceptional and Extraordinary Items under AS and Ind AS (IFRS)

The terms exceptional and extraordinary items are sometimes used interchangeably and creates practical issues as to whether any items can be labeled as such and if yes in which circumstances. The blog provides the understanding on the meaning of these terms, accounting treatment thereof in AS and Ind AS, the disclosure requirements and relevant extract from published financials.

1.  Meaning:

(a) Exceptional Items

The circumstances which may give rise to the separate disclosure, commonly referred as “Exceptional Items” are dealt with in Para 12-14, 85, 86 (and also para 97-98 of Ind AS 1).

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.

Para 85 states that additional line items, headings and subtotals in the statement of profit and loss shall be presented, when such presentation is relevant to an understanding of the entity’s financial performance.

Considering the above references from Ind AS, the additional line item “Exceptional Item” shall be presented separately in the statement of profit or loss in following circumstances:

• Such presentation is relevant and useful in understanding
• Financial performance achieved and
• In making projections of future financial performance
• Factors to be considered include
  • Materiality of item
  • Nature of item
  • Function of item

Further, para 86 states that disclosing the components of financial performance assists users in understanding the financial performance achieved and in making projections of future financial performance. An entity considers factors including materiality and the nature and function of the items of income and expense.

Para 97 states that when items of income or expense are material, an entity shall disclose their nature and amount separately.

(b) Extraordinary Items

Accounting Standards (AS) 5 “Net Profit or Loss for the period, Prior period items and changes in Accounting Policies” at para 4.2 defines ‘extraordinary items’ as: ‘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.

Para 9 AS 5 – Virtually all items of income and expense included in the determination of net profit or loss for the period arise in the course of the ordinary activities of the enterprise. Therefore, only on rare occasions does an event or transaction give rise to an extraordinary item.

Para 10 AS 5 – Whether an event or transaction is clearly distinct from the ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enterprise rather than by the frequency with which such events are expected to occur. Therefore, an event or transaction may be extraordinary for one enterprise but not so for another enterprise because of the differences between their respective ordinary activities. For example, losses sustained as a result of an earthquake may qualify as an extraordinary item for many enterprises. However, claims from policyholders arising from an earthquake do not qualify as an extraordinary item for an insurance enterprise that insures against such risks.

2. AS v Ind AS(IFRS)

Particulars	AS	Ind AS (IFRS)
Exceptional Items	It is not defined in AS. However, para 12, 13 and 14 of AS-5 requires separate disclosure of items that are material and relevant for understanding financial statement.	It is not defined in Ind AS. It has reference in para 85, 86 and 87 of Ind AS-1
Extraordinary Items	Para 4.2 of AS-5 defines Extraordinary items. Para 7 of AS-5 requires net profit or loss for the period should be disclosed on the face of Statement of profit and loss separately for –   profit or loss from ordinary activities –   extraordinary items	Para 87 of Ind AS -1 prohibits presentation of any items of income or expenses as extraordinary. The similar is the situation taken in IFRS and US GAAP. Kindly refer the below note for the details.

 

Note:

International Accounting Standards Board, (IASB), has removed the concept of extraordinary items under International Financial Reporting Standards (IFRS) in 2002. Similarly, Financial Accounting Standards Board (FASB) on January 9, 2015, via Accounting Standards Update (ASU) No. 2015-01, Income Statement—Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items removed with the concept of extraordinary items from US GAAP.

During discussion at FASB it was observed that the companies report extraordinary items in extremely rare cases, however auditors and regulators had to spend a lot of time in deciding if an event required a special reporting. Moreover, it noted that in the past, events such as terrorist attacks of September 11, 2001, and the Japanese tsunami in 2011 had also not been considered by FASB as extraordinary items.

The removal of extraordinary event concept from IFRS and US-GAAP was followed in India through Para 87 of Ind AS 1 which was drafted to direct that “An entity shall not present any items of income or expense as extraordinary items, in the statement of profit and loss or in the notes”.

3. Presentation and Disclosure in Financials

(a) Exceptional Items

Ind AS -1 provides the guidelines in which the separate disclosure is required along with examples. Para 98 gives circumstances that would give rise to the separate disclosure of items of income and expense and includes:

1. Write-downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs;
2. restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring;
3. disposals of items of property, plant and equipment;
4. disposals of investments;
5. discontinued operations;
6. litigation settlements; and
7. other reversals of provisions.

In case the company has more than one such item of income / expense of the above nature which is exceptional, then such items should be disclosed on the face of the Statement of Profit and Loss. Details of the all individual items should be disclosed in the Notes.

(b) Extraordinary Items

Ind AS 1 Presentation of financial statements

An entity shall not present any items of income or expense as extraordinary items, in the statement of profit and loss or in the notes.

AS 5 – Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies

Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss for the period. The nature and the amount of each extraordinary item should be separately disclosed in the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.

4. Relevant Extract from published financials

(a) Exceptional Items

Below are the samples of exceptional items from the published financial statements of entities:

Sr. No.	Nature of item	Disclosure
1	Provision towards legal claim   [TCS Limited 2020-21]	Company is fighting various legal claims at various courts of law, company will continue to pursue all legal options available in matter. Considering all facts and various legal precedence, on a conservative and prudent basis, company has provided for Rs.1,218 crores towards legal claims in its statement of profit or loss for the year ended on 31st March, 2021.
2	Loss on settlement with customer   [HCC Limited 2020-21]	During the year ended 31 March 2021, the Company has settled certain favorable arbitration awards and claims with one of the customers amounting to Rs.1,213.39 crore at a net loss of Rs.274.03 crore, which has been considered as an exceptional item
3	Reversal of gain on settlement of debt   [HCC Limited 2019-20]	During the year ended 31 March 2019, the Company had entered into settlement terms with lender wherein the parties agreed to settle the outstanding amounts for USD 6.20 Million which was repayable in 26 monthly instalments commencing from 31 May 2019 and ending on 30 June 2021. Under terms of Settlement Agreement, there would be no interest accruing on the facility going forward.   However, the Company was unable to pay the instalments as per schedule of settlement agreement and consequently the loan was restated from the settled value of USD 6.20 Million back to original value of USD 7.60 Million along with penal interest per annum at the rate equal to the sum of LIBOR plus the interest rate of 2.20% for the period from and including the date such amount was due to the lender. The facility was secured by first priority mortgage and security interest to and in favour of Wilmington Trust Company (the security trustee) on Hawker aircraft. During the previous year, the said aircraft has been sold and proceeds thereof have been adjusted towards the dues of this loan. Consequently, the loan was reclassified as unsecured in the previous year.
4	Impairment loss on assets   [Alok Industries Limited  2020-21]	The Company has been incurring operational losses over the past few years working at capacity utilization of about 30-35%. The carrying value of assets is based on a value in use calculation which uses cash flow projections based on financial budgets approved by the management covering a seven year period, and a discount rate of 11.61% per annum. Based on the dynamics of the sector in which Company operates, the management has assumed long term growth rate of 0% to calculate the terminal value. Accordingly, the Company has recognized an impairment loss of Rs. 8,264.22 crore on tangible assets during the year and is included in exceptional items for the year in the Statement of Profit and Loss
5	Extinguishement of operational creditors   [Alok Industries Limited 2019-20]	As per the resolution plan, in respect of Operational Creditors of whom erstwhile Resolution Professional had admitted claims upto ` 3 lakh, the Company has already paid the dues. With respect to other operational creditors outstanding as on the insolvency commencement date, the Company has recognized a gain of Rs. 938.97 crore on account of extinguishment of such liabilities as an exceptional item in these financial statements.
6	Loss on sale of investment in associates and subsidiaries   [Paytm 2020-21]	During the year ended March 31, 2020, the Company had entered into a Share Purchase Agreement to acquire 40% stake in Blueface Technologies Private Limited (‘Blueface’) and had invested 9.86 crore for acquisition of 40% holding. Further during the previous year, the Company had sold its 40% stake in Blueface Technologies Private Limited (‘Blueface’) for a cash consideration of INR 0.03 and recognized a loss of INR 9.83. During the year ended March 31, 2020, On September 10, 2019, the Company entered into a sale agreement to dispose of its investment in subsidiary Cube26 Software Private Limited resulting in loss of INR 0.68.
9	Provision for impairment of investments in associates and subsidiaries   [Paytm 2020-21]	The Company basis its assessment of future business projections of its subsidiaries i.e. Orbgen Technologies Private Limited, Little Internet Private Limited and Wasteland Entertainment Private Limited has recognized provision for impairment in the carrying value of its investments of INR Nil, INR Nil and INR 35 (March 31, 2020 : INR 43.40, INR 220.27 and INR 30), respectively, which has been shown as exceptional item in the Standalone Statement of Profit and Loss for the year ended March 31, 2021. During current year, the impairment loss for Wasteland Entertainment Private Limited was based on the equity value calculated based on cash flow projections with the business plan used for impairment testing using discounted cash flow method. During current year, the Company basis its assessment of future business projections of its associate, Eatgood Technologies Private Limited, has recognized provision of INR 30 for impairment in the carrying value of its investment. During previous year, the Company basis its assessment of future business projections of its associate, Loginext Solutions Private Limited, had recognized provision of INR 18 for impairment in the carrying value of its investment. Further, during the current year, the company ceased to have significant influence over Loginext Solutions Private Limited and the interest held in the entity has been recognised at its fair value.
10	Provision for allowance for Expected Credit Loss   [UTI Infrastructure Technology and Services Limited 2020-21	A provision for doubtful debts / allowance for expected credit loss have been made for Rs. 684.15 lakhs out of which Rs. 643.24 Lakhs relating to invoice of PAN storage and for Rs. 40.91 lakhs relating to MBPD division (ECHS-Rs.16.70 Lakhs, ESIC-Rs.17.59 Lakhs, ESIS-Rs. 0.05 Lakhs & CGHS-Rs.6.57 Lakhs)
11	RESTRUCTURING, IMPAIRMENT AND DISPOSALS   [TATA Steel 2010-11]	Restructuring, impairment and disposals included in exceptional items relate to restructuring, impairment, profit on disposals of fixed assets and undertakings and includes profit of Rs.2,503.19 crores on disposal of Teesside Cast Products to Sahaviriya Steel Industries, Thailand on 24th March, 2011.
12	Loss on measuring inventory at net realisable value   [TATA International 2020-21]	In respect of inventories of Coal carried as at March 31 2020, the Company has recorded a reduction of Rs 8,890.78 lakhs from the cost of such inventories, to reflect the net realizable value thereof. Market prices of Coal recorded a sharp reduction, which is attributable to the Covid-19 pandemic. The sharp reduction in these prices in a short period of time is highly unusual and accordingly, is disclosed as an exceptional item.
13	Gain on sale of property, plant and equipment   [TATA International 2018-19]	During the FY18-19, the company has sold a guest house situated at Dewas. The sale consideration of sale was Rs. 795.87 lakhs as against carrying value of Rs. 2.19 Lakhs resulted in profit of Rs. 793.68 Lakhs.
14	Asset held for sale pursuant to Ind AS 105, which requires assets to be measured at lower of its carrying amount and fair value less costs to sell.   [RIL  2021-22]	During the quarter, the Company has recognised loss of Rs. 36,143 crore (net of deferred tax of Rs. 6,386 crore) in the Statement of Profit and Loss as Exceptional Item on measurement of gasification undertaking as held for sale pursuant to Ind AS 105, which requires assets to be measured at lower of its carrying amount and fair value less costs to sell.
15	Provision for diminution in value of investment in subsidiary and joint venture   [Bharatforge 2017-18]	(I) BF Infrastructure Limited (BFIL, India) – Subsidiary BFIL had invested, as a minority partner, in two Oil Block exploration contracts awarded by the Government of India. Minimum work program (MWP) as well as testing of explored wells have been completed during the current financial year. Based on testing result of the wells and its techno-economic viability, BFIL has decided not to proceed beyond MWP stage and has provided all expenditure (including intangible under development) pertaining to MWP in the current financial year. Accordingly, considering the financial position of the subsidiary, the Company has provided an amount of Rs. 869.84 million towards diminution in carrying cost of its investments and Rs. 225.76 million towards diminution in carrying cost of its advances given in the current year. Further, the Company has provided for a loss of Rs.210.00 million relating to additional and final MWP payment to be made for the said oil block exploration contracts by the subsidiary.   (II) BF NTPC Energy Systems Limited (BFNTPCESL) – JV Considering BFNTPCESL has proceeded with liquidation of business, the Company has provided an amount of Rs.26.45 million towards iminution in carrying cost of its investments in current year
16	Provision for advance to subsidiary   [Bharatforge 2017-18]
17	Provision for expected losses   [Bharatforge 2017-18]
18	Impairment loss on certain long term investments and other exposures   [Mahindra 2020-21]	During the year ended 31st March, 2021, the performance of certain subsidiaries, associates and joint ventures along with the relevant economic and market indicators including the impact of certain capital allocation changes and uncertainties arising from Covid-19 resulted in indicators of impairment in respect of certain entities. Accordingly, the Company determined the recoverable amounts of the long term assets and other exposures related to these entities and recorded a provision of Rs. 3,921.60 crores (2020 : Rs. 3,381.03 crores) for the year ended 31st March, 2021. The value-in-use calculation use discount rates ranging from 12.0% – 25.0% and the terminal growth rates ranging from 2.0% – 7.0%.
19	Reversal of impairment of non-current investment and related obligations   [TATA Power 2019-20]	Your Company holds investments in Adjaristsqali Netherlands B.V. (ABV) (a joint venture of the Company operating 187 MW hydro power plant in Georgia) through intermediate holding company TPIPL. During the year, your Company performed the impairment assessment and recognised a reversal of Rs. 235 crore in impairment charge mainly on account of change in assumptions due to signing of PPA and renegotiating interest rates with lenders.
20	Gain on sale of Investment in Joint Venture   [TATA Power 2019-20]	During the year, your Company has sold its investment in Cennergi to Exxaro on 31st March 2020 for a consideration of Rs. 737 crore and recognised gain on sale of investment amounting to Rs. 533 crore. Further, your Company has hedged its receivable against the consideration to be received, fair value gain on the hedge instrument of Rs. 105 crore has been recognised as Other Income.

(b) Extraordinary Items

Common extraordinary items include

• damage from natural disasters
• damages caused by fires
• gains or losses from the early repayment of debt,
• write-offs of intangible assets.

Sr. No.	Nature of item	Disclosure
1.	One time grant Income   [ITI Ltd. 20151=-16]	Where the grants are for purpose of giving immediate financial support/ compensation for expenses incurred in a previous accounting period, with no further related cost/s, these are recognized as Extraordinary income in the Statement of Profit and Loss in the year of receipt.
2	Loss on extinguishment of debt [Reliance Industries 1999-00]	Under Indian GAAP debt extinguishment premiums are adjusted against Securities Premium account. Under US GAAP, such premium for early extinguishment of debt are expensed as incurred and treated as extraordinary item.