Shiny Bright plc was incorporated in 1980 to provide cleaning services for hotel, hospital and catering clients; it diversified into hotel ownership in the 1990s. In the early 1990s the company acquired a chain of 20 country hotels from Retort Hotels Ltd, a company then in receivership. Fifteen of the hotels were located in the South of England and five were located in Ireland. Since 1994 the directors have been preparing to seek a listing on the Alternative Investment Market and part of their strategy has been to dispose of operations that did not achieve an adequate return on capital employed.

At a recent seminar on reporting financial performance attended by the Managing Director, the seminar leader had briefly explained that exceptional items needed to be disclosed by virtue of their size or incidence, emphasised the importance of the operating profit figure and commented that it seemed that the market was often too easily misled by some companies' innovative use of FRS 3's layered approach to the profit and loss account to divert attention from the overall total result for which management was accountable.

When Shiny Bright plc was finalising its accounts for the year ended 31 October 1996 the Managing Director requested the Finance Director to make a brief presentation to the Board explaining exceptional items and innovative uses of the layered approach for the profit and loss account and advising on the accounting treatments that would produce the highest operating profit and on the presentation format that would concentrate attention on the EPS figure that was most favourable to the company.

The operating profit was \(£ 4\) million from continuing operations and \(£ 0.1\) million from its hospital cleaning services, which were discontinued in 1996 , before taking account of the following information.

1 The company had acquired a restaurant in Central London for \(£ 1\) million in 1991. It was revalued at \(£ 1.5\) million in 1993 . No depreciation had been provided on the property as it was company policy to maintain properties to a high standard.

The restaurant was sold on 30 September 1996 for \(£ 2.5\) million.

2 All of the hotels acquired from Retort Hotels Ltd which were located in Ireland were sold on 31 August 1996 for \(£ 12.5\) million. They were the only hotels operated by the company in Ireland and the directors decided that they were too distant for them to exercise effective management. They had been acquired for \(£ 16\) million at the date they were purchased from the receiver. No depreciation has been provided by the company. Shiny Bright plc has incurred costs of \(£ 1.4\) million arising from the reorganisation of the hotel administration. This comprised \(£ 0.5\) million for the centralisation of the accounting and booking function, \(£ 0.3\) million for refurbishing the reception area to a common plan, \(£ 0.4\) million for retraining staff and \(£ 0.2\) million for redundancy payments.

4 The fixed assets used for cleaning were estimated to have fallen in value by \(£ 0.75\) million following the discovery that cleaning equipment had suffered damage due to staff failing to follow the manufacturers' instructions.
5 There was an item on the agenda for the October 1996 Board meeting proposing the closure in the following financial year of a loss-making hotel. The Finance Director had prepared estimates for the following year for this hotel showing turnover \(£ 350000\), cost of sales \(£ 400000\), write down of equipment \(£ 50000\) and redundancy costs \(£ 40000\). The proposal was to complete the closure by May 1997.
Required Assuming that you are the Finance Director, you are required to

(a) (ii) Explain the terms size and incidence in relation to exceptional items and the major difficulties in applying these terms.
(ii) Explain how companies might be able to make use of FRS 3's layered approach to the profit and loss account to direct attention to a result other than the overall total result for which management was accountable.

(b) (i) Describe the accounting treatments in the profit and loss account for the year ended 31 October 1996 that would produce the highest operating profit figure, giving reasons to support your advice in respect of items \(1-5\) above.
(ii) Calculate the operating profit from continuing and discontinued operations for 1996 assuming that your advice was followed.
(iii) Describe the presentation of profit and loss account that would best direct attention to the profit figure most favourable to the company.