Extraordinary items in cash flow statements.

This query is : Resolved

Tanmay Tyagi (Querist)
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16 May 2012 Respected sir/Madam

I want to know about the extraordinary items stated in AS-5 (Revised). Also tell me whether we consider Provision for tax in extraordinary items or not.

CA SHAH DILEEPKUMAR

CA SHAH DILEEPKUMAR (Expert)
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16 May 2012
You go through AS-5 (Revised ) for your answer. However I state that Provision for tax is not an extraordinary item.

Tanmay Tyagi

Tanmay Tyagi (Querist)
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17 May 2012 Sir,
My queries are relating to CFS.
- Whether the provision for tax is an appropriation of profit or charge on profit or why it is taken in the Part I of P/L A/c.

-why the extra-ordinary items first excluded in the beginning and then included at the end while calculating cash from operating activities.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 Let's address your queries regarding extraordinary items in the context of cash flow statements (CFS), particularly in accordance with Accounting Standard (AS) 5 - Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

### Extraordinary Items in AS-5 (Revised):

1. **Definition of Extraordinary Items:**
Extraordinary items are defined in AS-5 as income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly.

2. **Treatment of Extraordinary Items in Financial Statements:**
- **Presentation in Profit and Loss Account:** Extraordinary items are presented separately in the profit and loss account (P/L A/c) before arriving at the net profit or loss for the period. They are shown net of tax effects, separately disclosing the related tax effect.

- **Exclusion from Operating Activities in CFS:** In the cash flow statement (CFS), extraordinary items are excluded from the calculation of cash flows from operating activities. This exclusion ensures that operating cash flows reflect the cash effects of transactions that are part of the normal business operations.

- **Cash Flow Statement (CFS) Treatment:** Initially, when calculating cash flows from operating activities, extraordinary items are excluded because they do not represent cash flows arising from operating activities. However, at the end of the calculation, adjustments are made to reconcile the net profit (which includes extraordinary items) to the cash flows from operating activities. This reconciliation involves adding back non-cash expenses (like depreciation, amortization) and adjusting for changes in working capital items.

### Provision for Tax:

- **Appropriation vs. Charge on Profit:** Provision for tax is considered a charge on profit rather than an appropriation of profit. It represents the estimated liability for income taxes based on current year's taxable income. It is typically recorded in Part I of the profit and loss account because it directly relates to the determination of net profit for the period.

- **Treatment in CFS:** Provision for tax is included in the calculation of cash flows from operating activities in the CFS. This is because it represents a non-cash expense (since cash outflow occurs when actual tax payments are made, not when provisions are created).

### Conclusion:

In summary:
- Extraordinary items are separately disclosed in the profit and loss account before arriving at net profit. They are excluded from operating activities in the CFS and reconciled at the end to arrive at cash flows from operating activities.
- Provision for tax is considered a charge on profit, included in Part I of the profit and loss account, and is treated as a non-cash expense in the CFS.

Understanding these distinctions and treatments ensures compliance with AS-5 guidelines and provides clarity in preparing and interpreting cash flow statements.