Company law requires the amount and nature of any income or expenditure of exceptional size or incidence to be stated, and FRS 102 paragraph 5.9A requires material items to be disclosed separately, either on the face of the profit and loss account or in the notes. Exceptional items remain part of ordinary activities; companies may not label anything extraordinary. The presentation must treat gains and losses even handedly and be applied consistently from year to year.

What does the law actually require?

The requirement comes from the accounts regulations rather than from an accounting standard:

  • Small companies. Schedule 1 paragraph 61(2) of the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 says the amount and nature of any individual items of income or expenditure of exceptional size or incidence must be stated. FRS 102 repeats this for small entities in paragraph 1AC.32.
  • Medium and large companies. Schedule 1 paragraph 69(2) of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 goes further: the amount, nature and effect of such items must be stated.

Neither the regulations nor FRS 102 define exceptional. The two triggers are size, meaning the item is large relative to the results, and incidence, meaning it is unusual for the business to incur it at all. An item can meet one test without the other.

What does FRS 102 add?

Two paragraphs in Section 5 apply to companies preparing full FRS 102 accounts. Paragraph 5.9 requires additional line items, headings and subtotals in the profit and loss account when that presentation is relevant to an understanding of financial performance. Paragraph 5.9A requires that when items included in total comprehensive income are material, their nature and amount are disclosed separately, either on the face of the statement or in the notes.

The glossary defines information as material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions users make on the basis of the financial statements. So the question is not whether an item is unusual in itself, but whether a reader would understand the results without being told about it. Section 3’s wider presentation rules are covered in FRS 102 Section 3.

Is an exceptional item the same as an extraordinary item?

No. Paragraph 5.10 says entities using the company or LLP profit and loss formats must not present or describe any item as extraordinary. Paragraph 5.10A defines ordinary activities widely, including the effects of events in the political, regulatory, economic and geographical environments, irrespective of the frequency or unusual nature of the events. Only banks and insurers using the other schedules can still have extraordinary items, and paragraph 5.10B confines those to material items with a high degree of abnormality that fall outside ordinary activities and are not expected to recur.

The practical effect is that a fire, a pandemic closure, a large legal settlement or a restructuring is shown within the normal profit and loss headings, with separate disclosure if it is material.

Which items are usually disclosed as exceptional?

Common candidates include:

  • restructuring and redundancy costs from a significant reorganisation;
  • impairment of goodwill or fixed assets;
  • profits or losses on selling property or a business;
  • a large one off legal settlement or regulatory fine;
  • insurance receipts for a major loss;
  • the release of a large provision made in an earlier year.

Where a whole business line has been sold, the more specific presentation for discontinued operations applies instead.

How can the presentation mislead readers?

The Financial Reporting Council has repeatedly challenged the way companies use exceptional items to present an underlying profit. Its December 2013 press notice set out what boards should consider:

  • the approach to identifying items should be even handed between gains and losses, clearly disclosed and applied consistently from one year to the next;
  • gains and losses should not be netted off unless permitted;
  • where the same category of material item, such as restructuring costs, recurs each year in similar amounts, companies should consider whether it belongs in underlying profit;
  • later changes to items previously shown as exceptional, including reversals, should also be identified separately so readers can track them;
  • the tax effect and material cash amounts should be explained;
  • where underlying profit is used for executive pay or loan covenants, the measure should be clearly disclosed.

The FRC’s October 2021 review of alternative performance measures repeated the call for even handed treatment of gains and losses, and asked companies to explain terms such as underlying and non recurring and to give more detail on the cash and tax impact of adjusting items.

What does one sided presentation look like?

Illustration only. A company reports operating profit of £400,000. That figure includes £120,000 of redundancy costs from a reorganisation and a £150,000 profit on selling its former head office.

Presentation Underlying operating profit £
Reported operating profit 400,000
Only the redundancy cost shown as exceptional 520,000
Both items shown as exceptional 370,000

Adding back only the cost flatters the trend by £150,000. Applying the same policy to both items gives £370,000, which is the honest picture of the continuing trade. If redundancy costs appear every year, labelling them exceptional at all is hard to defend.

How will IFRS 18 change this for IFRS reporters?

IFRS 18 applies to annual reporting periods beginning on or after 1 January 2027. It does not introduce an exceptional items category: paragraph 47 places all income and expenses in one of five categories, operating, investing, financing, income taxes and discontinued operations, so an unusual item sits in whichever category its type requires. Paragraph B78 lists persistence, including whether an item is recurring or non recurring, among the characteristics to consider when deciding whether to disaggregate, and paragraph 43 requires labels that faithfully represent the item. A subtotal such as adjusted operating profit that a company uses in public communications will usually be a management defined performance measure under paragraph 117, with a reconciliation in a single note. See IFRS 18 presentation and disclosure.

Does the exceptional label change the tax?

No. Under section 46 CTA 2009 trade profits are calculated in accordance with GAAP subject to adjustments required by tax law, and the label used in the accounts is not one of them. Each item is taxed by its nature. HMRC’s Business Income Manual at BIM35030 notes that capital receipts are not taxable as trade profits and capital expenditure is not deductible, so a profit on selling a building is removed from the trading computation and dealt with as a chargeable gain, while a revenue item such as a redundancy payment is treated under the normal deduction rules. See corporation tax explained.

What mistakes come up most often?

  • Describing items as extraordinary, which the formats prohibit.
  • Showing costs as exceptional while leaving one off gains in operating profit.
  • Treating recurring restructuring costs as exceptional every year.
  • Netting a gain and a loss into one exceptional figure.
  • Omitting the effect of exceptional items in medium or large company accounts, which paragraph 69(2) requires.
  • Forgetting the comparative year when the policy is applied for the first time.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.