I - EXPLANATORY NOTE

1. There are currently two different points of view on the treatment of extraordinary and prior year items. One view is that in order to avoid distortion, the profit and loss account for the year should include only the normal recurring activities of the business. It should therefore exclude extraordinary and prior year items, which should be taken direct to reserves of adjusted against the opening balance or retained profits.

(a) inclusion and disclosure of extraordinary and prior year items will enable the profit and loss account for the year to give a better view of a company’s profitability and progress;

(b) exclusion, being a matter of subjective judgement, could lead to variations and to a loss of comparability between the reported results of companies; and

(c) exclusion could result in extraordinary and prior year items being overlooked in any consideration of results over a series of years.

Extraordinary items

(a) the discontinuance of a significant part of a business;

(b) the sale of an investment not acquired with the intention of resale;

(c) writing off intangibles, including goodwill, because of unusual events or developments during the period; and

(d) the expropriation of assets.

4. In order to present fairly the results from the ordinary activities of the business, extraordinary items require to be disclosed in the profit and loss account after ordinary results have been ascertained.

5. Items which, though abnormal in size and incidence, are not extraordinary items (as defined in paragraph 11) because they derive from the ordinary activities of the business would include:

(a) abnormal charges for bad debts and write-offs of stocks and work in progress and research and development expenditure;

(b) abnormal provisions for losses on long term contracts; and

(c) most adjustments of prior year taxation provisions

These items, because they derive from ordinary activities, should be reflected in the ascertainment of profit before extraordinary items although because of their unusual size and incidence, they may require disclosure if a true and fair view is to be given.

6. At a time of frequent movement of currency exchange rates, the accounting treatment of foreign currency transactions and conversions and the distinguishing of items that are extraordinary present many problems.

These problems are currently under study with a view to the issue of a separate accounting standard. In the meantime, the accounting policies adopted should be disclosed and explained in accordance with Statement of Standard Accounting practice No. 3. 2 DISCLOSURE OF ACCOUNTING POLICIES.

7. Prior year adjustments, that is prior year items which should be adjusted against the opening balance of retained profits or reserves, are rare and limited to items arising from changes in accounting policies and from the correction of fundamental errors. They are discussed in the paragraphs that follow. The majority of prior year items however should be dealt with in the profit and loss account of the year in which they are recognised and shown separately if material. They arise mainly from the corrections and adjustments which are the natural result of estimates inherent in accounting and more particularly in the periodic preparation of financial statements. Estimating future events and their effects requires the exercise of judgement and will require reappraisal as new events occur, as more experience is acquired or as additional information is obtained. Since a change in estimates arises from new information or development it should not be given retrospective effect by a restatement of prior years. Sometimes a change in estimate may have the appearance of a change in accounting policy and care is necessary in order to avoid confusing the two. For example, the future benefits of a cost may have become doubtful and a change may be made from amortising the cost over the period of those benefits to writing it off when incurred. Such a change should be created as a change in estimate and not as a change in accounting policy.

Prior year items are not extraordinary merely because they relate to a prior year; their nature will determine their classification.

8. It is a fundamental accounting concept that there is consistency of accounting treatment within each accounting period and from one period to the next. A change in accounting policy should therefore not be made unless it can be justified on the ground that the new policy is preferable to the one it replaces because it will give a fairer presentation of the results and of the financial position of the business. For example, the issue of a Statement of Standard Accounting Practice that creates a new accounting basis or expresses a preference for a basis not at present in use in the company is sufficient ground for making a change. It is a characteristic of a change in accounting policy that it is the result of choice between two or more accounting bases. It therefore does not arise from the adoption or modification of an accounting basis necessitated by transactions or events that are clearly different in substance from those previously occurring. An example of a change in accounting policy would be a change in the method of computing the cost of stock and work in progress from one which includes no overheads to one which includes all productions overhead. In the case of a change in accounting policy, the cumulative adjustment applicable to prior years have no bearing on the results of the current year and they should therefore not be included in arriving at the profit for the current year. They should be accounted for by restating prior year with the results that the opening balance of retained profits will be adjusted accordingly. The effect of the change should be disclosed where practicable by showing separately in the restatement of the previous year the amount involved.

9. In exceptional circumstances accounts may have been issued containing errors which are of such significance as to destroy the true and fair view and hence the validity of those accounts and which would have led to their withdrawal had the errors been recognised at the time. The corrections of such fundamental errors should be accounted for not by inclusion in the profit and loss account of the current year but by restating the prior year(s) with the result that the opening balance of retained profits will be adjusted accordingly.

10. There are a few special instances where items of a revenue or expense nature are permitted or required either by law or by a company s constitution, to be taken to reserves. For example, Section 56 of the Companies Act 1965 permits the preliminary expenses of a company or the expenses of, or the commissions paid or discount allowed on, any issue of its shares or debentures to be written off against the premium account. It also permits the share premium account to be used in providing for the premium payable on redemption of a. redeemable preference shares or of any debentures of the company. Another example is the common requirement in the Articles of Association of many property and investments holding companies take the profits on sale of properties or investments to capital reserves. So as to reflect the effect of all such items on the profit or loss for the year, they should be dealt with by taking them on an amortised basis where appropriate, to the profit and loss account and by transferring an equivalent amount between reserves and the profit for the year.

II. DEFINITIONS OF TERMS

11. Extraordinary Items, for the purpose of this statement, are those items which derive from events or transactions outside the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. They do not include items which, though exceptional on account of size and incidence (and which may therefore require separate disclosure), derive from the ordinary activities of the business. Neither do they include prior year items merely because they relate to a prior year.

12. Prior Year Adjustments, are those material adjustments applicable to prior years arising from changes in accounting policies and from the correction of fundamental errors. They do not include the normal recurring corrections and adjustments of accounting estimates made in prior years.

Profit after extraordinary items

13. The profit and loss account for the year should show a profit or loss after extraordinary items, reflecting all profits and losses recognised in the accounts of the year other than prior year adjustments as defined in part H and unrealised surpluses on revaluation of fixed assets which should be credited direct to reserves.

15. Extraordinary items as defined in part II (less attributable taxation) should be shown separately in the profit and loss account for the year after the result derived from ordinary activities and their nature and size disclosed.

16. Prior year adjustments as defined in part II (less attributable taxation) should be accounted for by restating prior years, with the result that the opening balance of retained profits will be adjusted accordingly. The effect of the change should be disclosed where practicable by showing separately in the restatement of the previous year the amount involved. Items which represent the normal recurring corrections and adjustments of accounting estimates made in prior years should be included in the profit and loss account for the year and, if material, their nature and size should be disclosed.

17. As a result of the foregoing, the profit and loss account for the year should if there are extraordinary items, include the following elements:

18. The accounting practices set out in this Statement should be adopted as soon as possible and regarded as standard in respect of financial statements relating to accounting periods beginning on or after 1st January 1975.

IV - NOTE ON LEGAL REQUIREMENTS

19. The application of the foregoing standard accounting practice will provide the disclosure required by paragraph 14 (6) (a) of Schedule 8 to the Companies Act 1965 which requires the following to be stated by way of note if not otherwise shown:

(2) Items within the normal activities of the company which require disclosure on account of their abnormal size and incidence.