The new definition of extraordinary result and its impact on performance-related contracts of the company

A recent regulation issued by the French accounting standards authority (ANC) has changed the definition of exceptional income in the accounts of companies and establishments located in France.

When does the new rule come into effect?

This new rule will be mandatory for financial years beginning on or after 1 January 2025, but it can by option be applied as of now.

What’s new?

The new definition specifies that exceptional income now comprises only two categories of items:

– Income and expenses relating to a major and unusual event. A major event is one whose consequences have an influence on the judgement made on the financial statements; an unusual event is one that is unrelated to the entity’s normal operations or is rare.

– Items that, by their nature, form part of exceptional income. These are purely tax accounting entries, the effects of changes in accounting methods and corrections of errors.

What is the impact on contracts based on company performance?

Many transactions that were previously recorded as extraordinary result may now be classified as operating result. For example, the disposal of a fixed asset may be recognised in profit or loss while under the previous standard it would have been recorded under extraordinary result.

This has an impact on contracts whose indicators are modified by the new definition of extraordinary result. This applies in particular to collective profit-sharing contracts and bonus contracts tied to company performance. For example, exceptional remuneration based on operating profit could vary significantly as a result of the new definition alone.

The special profit-sharing reserve is also affected: its calculation formula takes current profit into account and, for example, the transfer of a positive extraordinary result to operating profit would have the effect of reducing the profit-sharing paid to employees.

What action can be taken to manage the effects of this reform?

In order to manage the potential impact of these new regulations, renegotiation of the profit-sharing agreement and other contracts based on the company’s performance may be considered by means of an amendment, in compliance with the procedures and in particular the legal deadlines.

Your Groupe Cofimé contacts will be happy to help you with these procedures.