Definition
Above-the-line refers to those items in a company’s financial statements, specifically within the profit and loss account, that appear above a horizontal line that traditionally separates operational earnings from how those earnings are subsequently allocated among shareholders. This section typically includes standard revenue and cost items that directly impact a company’s reported profit or loss.
Historical Context and Contemporary Practice
Historically, until the advent of the Financial Reporting Standard (FRS) 3 in October 1992, items classified as exceptional but still within the ordinary activities of a business were reported above the line. In contrast, extraordinary items—those outside the ordinary business operations—were placed below it. This older methodology allowed some leeway in financial reporting, enabling companies to potentially manipulate how profits and losses were reported, significantly impacting key metrics such as earnings per share (EPS).
Critiques over these definitions led to major changes with FRS 3. It marked a pivotal shift, essentially abolishing the distinction between extraordinary and exceptional items. Under current UK accounting standards, particularly the Financial Reporting Standard Applicable in the UK and Republic of Ireland, virtually all items that would have previously been considered extraordinary are now treated as exceptional and included above the line. This adjustment has resulted in a more rigorous and straightforward outline of a business’s financial health, minimizing opportunities for creative accounting.
Implications for Stakeholders
For investors and financial analysts, understanding the composition of above-the-line items is crucial for accurate assessment of a company’s core operational performance. Misclassification or manipulation of these entries can distort an entity’s financial outlook, misleading stakeholders about the true economic condition of the business.
Related Terms
- Below-the-Line: Refers to items listed below the primary operational earnings on a company’s profit and loss account, which include appropriations of profit and tax impacts.
- Exceptional Items: Expenses or revenues considered unusual but part of ordinary business activities, now commonly included above the line.
- Extraordinary Items: Previously used to classify events or transactions outside the normal scope of business, no longer recognized under many modern accounting standards.
Further Reading
- “Financial Reporting Standards Explained” – An in-depth guide to the evolution and application of financial reporting standards in the UK.
- “The Impact of Accounting Choices on Financial Metrics” – Analyzing how accounting decisions influence key business metrics, such as earnings per share.
By navigating the sometimes murky waters of financial terminology like “above-the-line”, stakeholders can better safeguard themselves against the financial storms that occasionally hit the markets, ensuring they stay on the profitable side of operations.
