1.36 Query
Disclosure of extraordinary items.
1. A public sector corporation, registered under the Companies Act, 1956, proposes to disclose following items in its profit and loss account:
(1) Long term settlement with employees
The corporation negotiates long term settlement with the employees after an interval of 4 to 5 years. It takes about 1-2 years to arrive at the settlement, for example, a settlement finalized in 1987-88 may be effective from 1.4.1986. Accordingly, the wages for 1986-87, as per long term settlement are to be booked in the accounts for 1987-88. No provision was made in the accounts of 1986-87, as the policy of the corporation was not to make provision as the negotiations were not completed and it was difficult to quantify the provision. Before Accounting Standard 5 (AS- 5), issued by the Institute of Chartered Accountants of India, was made mandatory, the amount pertaining to long term settlement, whenever it was finalized, insofar as related to the previous years, was shown as a prior year expense. However, after the AS 5 becoming mandatory, the additional wages (i.e. amount relating to other than the current year) would be shown as extraordinary expense instead of as a previous year’s transaction. There has been a difference of opinion among the auditors of the corporation. One view is to show the expenditure for 1986-87 also as the current year expenditure instead of as an extraordinary expense, while the other view is to show the expenditure of 1986-87 as an extraordinary expense, in view of the fact that the long term settlement is not a frequent occurrence and is done once in 4 to 5 years. However, while finalizing the accounts for 1987-88, expenditure pertaining to 1986-87 has been shown as an extraordinary expense.
(2) Income arising out of revision in margins by Pricing Committees
Government of India has been appointing pricing committees from time to time to determine the margins allowable to the oil companies under the administrative pricing system in addition to the cost escalations as the prices of petroleum products are fixed on cost-plus basis. However, it takes 2-3 years for these committees to finalise the report and acceptance thereof by the Government. The report of such a committee is normally applicable for a period of 3 years during which the reliefs as accepted by the Government are continued to be allowed. The Government thereafter appoints the committee for reviewing the costs and margins. During 1987-88, similar margins have been allowed retrospectively. The margins which have accrued to the corporation for periods earlier than 1987-88, i.e., 1986-87 and 1985-86 have been shown as extraordinary income as against ‘prior period income’ depicted before AS 5 became mandatory, on the ground that such pricing reliefs are not granted every year and are allowed once in 3-4 years as and when the committee’s recommendations are accepted by the Government.
2. The querist has sought the opinion of the Expert Advisory Committee on whether, in the above-mentioned circumstances, expenses and income arising out of long term settlement with the employees and revision in margins by pricing committees, respectively, should be disclosed as extraordinary items or ordinary items.
Opinion November 15, 1988
1. The Committee notes that Accounting Standard 5 (AS 5), issued by the Institute of Chartered Accountants of India, defines ‘Extraordinary Items’ as “gains or losses which arise from events or transactions that are distinct from the ordinary activities of the business and which are both material and expected not to recur frequently or regularly. These would also include material adjustments necessitated by circumstances, which though related to previous periods, are determined in the current period.”
2. The Committee is of the view that amounts of expenses and income related to the previous periods, arising out of long term settlement with the employees and revision in the margins by pricing committees, respectively, are ‘material adjustments necessitated by circumstances, which though related to previous periods, are determined in the current period.’ The Committee is therefore of the opinion that it is proper to disclose the aforesaid items as Extraordinary Items in the profit and loss account.
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