Exceptional, extraordinary and prior period items under Schedule III and AS 5

Exceptional items under Schedule III, extraordinary items and prior period items are three different things, but in small-company accounts they are often lumped together. Last year's missed bill ends up labelled "extraordinary", or a large profit on selling a building is hidden in other income. Division I of Schedule III (often searched as Schedule 3) gives the first two their own lines on the face of the Statement of Profit and Loss, and calls for notes on all three. The definitions come from AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. This guide sets out where each item goes, how AS 5 draws the lines, ten common items classified, a worked presentation and how AS 5 differs from Ind AS 8. It applies to companies following the Accounting Standards (Division I). For the whole format, see our Schedule III guide.

Exceptional and extraordinary items in Schedule III: where they sit

Part II of Division I places both items below total expenses and above tax:

Line XI, profit for the period from continuing operations, is printed in the Schedule as "(VII-VIII)". In practice it is computed as IX less X. The notes come from paragraph 5(i) of the General Instructions for the Statement of Profit and Loss: clause (l) asks for details of items of exceptional and extraordinary nature, and clause (m) asks for prior period items. Prior period items have no line of their own on the face. The Note to the General Instructions allows additional line items on the face where that is relevant to understanding performance or needed to comply with the Accounting Standards, and many companies show a separate "Prior period items (net)" line. Division II (Ind AS) keeps only "Exceptional items", so do not carry the Division I wording into Ind AS accounts. Our article on Schedule III Division I, II and III covers which division applies.

Exceptional items: the AS 5 paragraph 12 test

Schedule III does not define "exceptional items". ICAI's Guidance Note on Division I (Revised January 2022, para 9.6) points to paragraphs 12 to 14 of AS 5. Paragraph 12 requires separate disclosure of the nature and amount of items within profit or loss from ordinary activities that are "of such size, nature or incidence" that disclosure is relevant to explain performance for the period. Paragraph 14 lists circumstances that may call for it:

• write-down of inventories to net realisable value, and reversal of such write-downs;
• restructuring of activities, and reversal of restructuring provisions;
• disposals of items of fixed assets (property, plant and equipment in the Guidance Note);
• disposals of long-term investments;
• legislative changes having retrospective application;
• litigation settlements; and
• other reversals of provisions.

Two points matter in practice. First, exceptional items are still ordinary: AS 5 para 13 says they are not extraordinary items. Second, the Guidance Note says that where a company has more than one such item, the aggregate is shown on the face against line VI and the details of each item go in the notes. A disposal is not exceptional just because it is a disposal. The test is size, nature or incidence, so a small loss on scrapping old furniture stays in other expenses. Treat it as a judgement and record the reasoning, in the same way as for materiality under SA 320.

Extraordinary items under AS 5: clearly distinct and rare

AS 5 para 4.2 defines extraordinary items as income or expenses arising from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore not expected to recur frequently or regularly. Paragraph 8 requires each extraordinary item to be disclosed in the Statement of Profit and Loss, as part of net profit or loss, with its nature and amount shown so that its impact on current profit or loss can be perceived. The rest of the standard narrows the term:

• It is rare. Para 9 says virtually all income and expense arises in the course of ordinary activities, so only on rare occasions does an event give rise to an extraordinary item.
• Nature, not frequency. Para 10 says the test is the nature of the event in relation to the business, not how often it happens. The same event can be extraordinary for one enterprise and ordinary for another: earthquake losses may qualify for many enterprises, but policyholder claims from an earthquake do not qualify for an insurer that insures against such risks.
• The examples are narrow. Para 11 gives attachment of property of the enterprise and an earthquake.

Other standards also send items to this line. AS 12 (para 11.1) says a government grant that becomes refundable is treated as an extraordinary item. AS 3 (para 28) requires the cash flows from extraordinary items to be classified as operating, investing or financing and disclosed separately. AS 20 (para 48(i)) requires basic and diluted earnings per share excluding extraordinary items (net of tax) as well. A Small and Medium Sized Company need not disclose diluted EPS, either including or excluding extraordinary items. A large bad debt or a one-off consultancy fee arises from ordinary activities, so it is exceptional at most, not extraordinary.

Prior period items under AS 5: errors and omissions only

AS 5 para 4.3 defines prior period items as income or expenses arising in the current period as a result of errors or omissions in preparing the financial statements of one or more prior periods. Paragraph 17 says such errors may come from mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts or oversight. Paragraph 15 requires their nature and amount to be disclosed separately in the Statement of Profit and Loss in a manner that their impact on current profit or loss can be perceived. Under paragraph 19 they are normally included in determining net profit for the current period, and the alternative is to show them after current net profit is determined.

Three things that look like prior period items are not:

Where it is hard to tell a change in policy from a change in estimate, paragraph 22 says to treat it as a change in estimate, with disclosure. Excess or short provision of income tax for earlier years is not a prior period item either. The Guidance Note (para 9.8.1.5) asks for it to be disclosed separately within tax expense.

Ten items classified: exceptional, extraordinary or prior period?

"If material" matters. An item that is not material stays in its natural head, such as other income or the other expenses note. Profit on sale of fixed assets that is not exceptional is shown under other income (Guidance Note para 9.1.9), as explained in our guide to revenue from operations vs other income.

Worked example: presentation in the Statement of Profit and Loss

A manufacturing company has, for FY 2025-26, three prior period entries, two exceptional items and flood damage at one unit. Management treats the flood as extraordinary because of its nature in relation to the business, by analogy with the earthquake example in AS 5 para 11, and the auditor agrees after reviewing the facts. The face reads (₹ in lakh):

The three notes behind the face:

A few points on the example. The comparatives for 2024-25 are not restated, even though Note 25 corrects that year's errors. Showing gross items in the note (VRS and the profit on sale separately) satisfies the "details of all individual items" point in the Guidance Note. AS 5 (para 3) does not deal with the tax effect of these items. The company also discloses EPS excluding the extraordinary item, net of tax, under AS 20. Finally, the cash flows associated with the extraordinary item, such as the insurance money when received, are shown separately in the cash flow statement under AS 3.

AS 5 vs Ind AS 8: the differences that matter

The practical consequence for a Division I company is that last year's audited figures stay as they were. The correction is visible only through the prior period line, so that disclosure has to be complete.

The audit report and CARO angle

• Opening balances (SA 510). In an initial audit engagement, paragraph 6(a), as issued in India, asks the auditor to check that the prior period's closing balances have been brought forward correctly or, where appropriate, that adjustments have been disclosed as prior period items in the current year's Statement of Profit and Loss. If opening balances contain a misstatement that materially affects the current year and it is not properly accounted for or disclosed, paragraph 11 calls for a qualified or adverse opinion under SA 705 (Revised).
• Uncorrected misstatements (SA 450). Paragraph 11(b) requires the auditor to consider the effect of uncorrected prior period misstatements, and paragraph A18 notes that immaterial ones can add up to a material effect in the current year.
• Labels are a reporting point. An item called "extraordinary" that fails the AS 5 test, or errors mixed into ordinary expenses, is a misstatement of presentation, not just a drafting slip. Raise it with management before the report is signed.
• CARO 2020 clause 3(viii). Where income has been surrendered or disclosed in tax assessments, ICAI's CARO Guidance Note (Revised 2022, para 61) says the auditor should evaluate whether it must be classified as an extraordinary item under AS 5. Our list of CARO 2020 clauses that are easy to get wrong covers the rest of that clause.

In practice, ask for a ledger-wise list of entries passed this year that relate to earlier years, and classify each one with the table above before the face is drafted.

Frequently asked questions

Sources

• Companies Act, 2013 — Schedule III, Division I, Part II, General Instructions and Note, and para 5(i)(l) and (m) of the General Instructions for the Statement of Profit and Loss (India Code, amended text)
• ICAI — Guidance Note on Division I – Non Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022), paras 9.6, 9.7, 9.8.1.5 and 10.4
• Companies (Accounting Standards) Rules, 2021, G.S.R. 432(E) — AS 3 para 28, AS 5, AS 12 para 11.1, AS 20 paras 1 and 48
• Companies (Indian Accounting Standards) Rules, 2015 — Ind AS 1 paras 87 and 97; Ind AS 8 paras 19 to 23 and 42
• ICAI — SA 510, Initial Audit Engagements – Opening Balances, paras 6 and 11
• ICAI — SA 450, Evaluation of Misstatements Identified during the Audit, paras 11 and A18
• ICAI — Guidance Note on CARO 2020 (Revised 2022), para 61

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