whether VRS compensation paid,to be treated as under Extraordinary items or as under Exceptional items ?
The nature of VRS compensation needs to be assessed on company to company basis before it is categorized either as Extraordinary item or as Exceptional item.
AS 5 ‘Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies’ defines Extraordinary items 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. AS 5 further defines ordinary activities as activities which are undertaken by an enterprise as part of its business and such related activities in which the enterprise engages in furtherance of incidental to, or arising from, these activities.
The term ‘Exceptional item’ is used in Schedule III of the Companies Act, 2013 but not defined in Schedule III of the Companies Act, 2013. Relevant guidance can be derived from AS 5. AS 5 provides that when items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such items should be disclosed separately [Para 12 of AS 5].
Although the items of income and expense described in paragraph 12 are not extraordinary items , the nature and amount of such items may be relevant to users of Financial Statements in understanding the financial position and performance of an enterprise and in making projections about financial position and performance. Disclosure of such information is sometimes made in the notes to the Financial Statements.
Circumstances which may give rise to the separate disclosure of items of income and expense in accordance with paragraph 12 include:
the write-down of inventories to net realisable value as well as the reversal of such write-downs;
a restructuring of the activities of an enterprise and the reversal of any provisions for the costs of restructuring;
disposals of items of fixed assets;
disposals of long-term investments;
legislative changes having retrospective application;
litigation settlements; and other reversals of provisions.
Accordingly, VRS expense should be assessed whether it is an expense arising from ordinary activities or not. In case VRS expense is an expense which does not fall under ordinary activities then such expense should be classified under ‘Extra-ordinary items’.
However, in case VRS expense is an expense from ordinary activities but is of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise then such expense may be classified as ‘Exceptional items’.
Conclusion: Generally, VRS/ VSS compensation is treated as exceptional items.