Accounting for a one-off payment

The accounting treatment of the tax will depend upon its nature. This will determine whether it is included as part of the tax charge or as an operating cost in arriving at operating profit.

It most certainly will not be treated as an extraordinary item - as these are effectively prohibited by the accounting standard FRS 3 "Reporting financial performance" - or as a prior year adjustment.

Since the windfall tax is not a tax on the company's profits, but is based on valuations, it should be included under an appropriate profit and loss account heading in arriving at operating profit.

Examples of taxes treated as "above the line" items which are in some way analogous are Petroleum Revenue Tax and the levies paid by independent television broadcasters.

The last example of a one-off levy was the 1981 Special Banking Deposits Levy.

At the time, the banks accounted for this as an extraordinary item - not of course an option that is available now.

A further aspect of FRS 3 which might come into play, but in the case of a one-off item is unlikely to be a "fundamental change", is a paragraph that states that "the effects of a fundamental change in the basis of taxation should be included in the tax charge or credit for the period and separately disclosed on the face of the profit and loss account".

As is most likely, the windfall tax change will have to be dealt with in a utility's 1998 accounts.

That the change might relate to earlier years is insufficient grounds for it to be treated as a prior year adjustment.

Paragraph 60 of FRS 3 limits prior year adjustments to items relating to changes in accounting policies or from the correction of fundamental errors.

Neither of these grounds is triggered by the proposed windfall tax.

The amount included in the 1998 profit and loss account in respect of earlier years is of course disclosable under the Companies Act 1985, but it remains a 1998 item.

Nigel Dealy is director, UK accounting at Price Waterhouse.