Exceptional but not Extraordinary? Labelling “atypical” income and expenses.

Image result for permanent tsb

So Permanent TSB (“PTSB”) posted a loss after tax loss of (€266m) for 2016.

Of interest to me though is the other “headline” figure that received as much media attention: Profit before tax and exceptional items of €188m.

So what is exceptional or more specifically, what is an exceptional item? According to PTSB’s accounting policies: “Exceptional items are a material component of the group’s profit or loss which would not ordinarily occur while carrying out normal business activities. Consequently due to their materiality, they are presented separately in the income statement to provide ease of analysis for the user of these financial statements.”

PTSB prepares it’s consolidated financial statements under International Financial Reporting Standards (IFRS). One of the main standards, International Accounting Standard (IAS) 1 specifically prevents FS preparers from classifying items as “extraordinary”. However,  the use of “exceptional items” does not fall victim to the same prohibition, something that would lead to a very interesting semantics debate I’m sure you will agree.

The exceptional items posted by PTSB can be summarised as:

  • Loss on disposal of loan book assets: €399m
  • Net restructuring cost for group risk function: €15m

It is quite subjective to determine whether a group can use the exceptional tag or not for a given item and it is certainly very difficult to critique a group’s approach when you don’t have all the background information. However, in PTSB’s case, one item that did not gain “exceptional” status is a gain of €24m from the sale of the group’s share in Visa Europe Ltd. Instead, this gain was included under the heading of “Net Other Operating Income” which feeds directly into the headline profit figure of €188m mentioned above. What makes this a normal business activity and the restructuring cost an exceptional item? Restructuring is not that uncommon for large organisations… Also, the company only holds equity securities relating to one entity – Visa… So is the purchase/sale of these investments an ordinary business activity? Food for thought…

In summary, stakeholders like investment analysts will take annual reports like PTSB’s and prepare their own financial models to represent, for example, their own assumptions of what is exceptional/not exceptional etc. It is doubtful that less technically proficient stakeholders engage in the same exercise but I think a minimum requirement for such stakeholders is to at least have an awareness of the subjective classifications that organisations may use in their financial statements.

 

 

 

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