Your Client’s Company Made a Loss After a One-Off Cost: Can a Mortgage Lender Look Beyond It?

The Client Situation

The latest accounts may be affected by:

• a completed office, warehouse or factory move;
• redundancy and restructuring costs;
• legal settlement or professional fees;
• bad debt from one failed customer;
• impairment or write-off of an asset;
• exceptional repair after a specific event;
• acquisition, sale or refinancing costs;
• launch expenditure for a new division;
• stock write-down or obsolete inventory;
• owner illness or temporary closure;
• accelerated depreciation or amortisation; or
• a combination of weaker trade and genuinely unusual costs.

The danger is binary thinking. The accountant should not say the loss is irrelevant; the lender should not be expected to conclude that every negative year represents permanent decline without reviewing the facts.

Use Precise Accounting Language

Companies House guidance says statutory accounts report the company’s performance and position and generally include a profit and loss account, balance sheet and notes. They must follow an applicable accounting framework.

FRS 102 provides for separate disclosure of material income and expense items but does not permit income or expenses to be described as “extraordinary items.” For a mortgage explanation, use language such as:

• separately disclosed material item;
• non-recurring cost, where demonstrably true;
• one-off event completed in the period;
• non-cash accounting charge;
• timing difference;
• normalisation adjustment prepared for analysis; or
• management’s underlying trading measure.

Avoid “exceptional” as a casual synonym for “we want it ignored.” If the same type of cost occurs every year under a different label, it is part of normal performance.

Adjustment Credibility Map

Separate Profit Adjustment From Cash Consequences

A lender considering an add-back may still reduce confidence if the event exhausted reserves, increased debt or revealed a wider operational weakness. Provide both the adjusted profit bridge and the closing/current balance-sheet position.

What a Mortgage Lender May Examine

The lender’s focus depends on whether the director’s income is assessed through salary and dividends, salary plus company profit, retained profits or another specialist method. It may review:

• two or three years of signed accounts;
• the statutory loss and notes;
• the accountant’s adjustment schedule;
• current management accounts;
• company bank statements;
• order book, contracts and debtor quality;
• tax liabilities and payment arrangements;
• loans, overdraft and creditor days;
• director remuneration and distributable reserves;
• shareholder or director loan movements;
• current cash and working capital;
• restructuring benefits or continuing costs;
• personal commitments and proposed mortgage; and
• industry and customer concentration.

Some lenders will apply their standard average or latest-year rule and decline. Others may consider the underlying and current position. The broker’s work is to find the latter only where the evidence justifies it.

One-Off Loss Evidence Pack

How to Use Current Management Accounts Properly

Current management accounts become more persuasive when they:

• cover a meaningful completed period;
• use consistent accounting policies;
• include balance sheet as well as profit and loss;
• show prior-year and budget comparisons;
• reconcile to bank, debtors, creditors and VAT;
• separate the previous unusual cost from new normal expenditure;
• show director remuneration and tax;
• include the effect of any cost savings;
• identify seasonality; and
• avoid annualising an unrepresentative peak month.

An accountant’s letter should state what has happened, what is evidenced and what remains forecast. It should not certify that the lender’s mortgage is affordable or guarantee future profit.

Worked Example: £40,000 Loss After £270,000 of Identified Costs

A manufacturing company reported £320,000 profit in the prior year and a £40,000 loss in the latest accounts. The latest period included £180,000 of relocation and dual-running costs and a £90,000 settlement of a historic dispute. Both matters are complete. Without mechanically asserting a lender figure, management’s analytical bridge shows £230,000 before those identified items.

Nine months of current management accounts show £210,000 profit, but company cash remains below the earlier level because the costs were paid and a new premises deposit was funded. The company also has a larger overdraft. Director salary and dividends total £110,000.

The accountant provides the signed accounts, detailed ledger, supporting documents, adjustment bridge, managements, balance sheet, bank statements and cash forecast. Willow identifies lenders able to review current director-income evidence and separately tests affordability based on their permitted calculation.

The lender may accept all, part or none of the adjustment. The £230,000 bridge explains trading; it does not erase the £40,000 statutory loss or restore the cash that left the business.

When the “One-Off” Argument Is Weak

Expect resistance where:

• similar restructuring appears in several years;
• legal costs arise from the normal business model;
• bad debts show poor recurring credit control;
• marketing spend is needed every year;
• maintenance was deferred rather than exceptional;
• the impairment reflects a failed ongoing strategy;
• current managements show another decline;
• cash remains dependent on overdraft or unpaid creditors;
• the event has unresolved follow-on liabilities;
• management describes normal payroll or rent as non-recurring;
• the adjustment changes after the mortgage target is known; or
• the accountant cannot reconcile it to the accounts.

In these cases, waiting for a stronger completed period or using a different income basis may be more credible than pressing for a full adjustment.

Losses, Liquidity and Going Concern

A one-year loss does not automatically mean the company is not a going concern. Equally, positive adjusted EBITDA does not prove solvency or liquidity. The FRC’s current guidance emphasises company-specific assessment of going concern, solvency and liquidity risks.

If directors or the accountant have identified material uncertainty, covenant pressure, inability to pay debts or reliance on uncertain support, that position must not be hidden behind an adjusted-profit schedule. Appropriate accounting, legal or insolvency advice takes priority over a mortgage application.

Where the Professional Boundaries Sit

The accountant prepares compliant accounts, identifies material items, reconciles analytical adjustments, reports current trading and advises on reserves, tax and going concern within their engagement. The directors remain responsible for the accounts and forecasts.

Willow identifies lenders willing to consider the evidenced situation, recommends suitable finance and coordinates underwriting. The lender decides whether an adjustment is acceptable and which income figure is used.

Willow does not restate accounts, label costs non-recurring or assess going concern. The accountant should not promise that adjusted profit will be accepted for a mortgage.

Common Mistakes to Avoid

• Calling the cost extraordinary: use compliant, precise language.
• Replacing statutory loss with adjusted profit: present both.
• Adding back cash costs without discussing liquidity: cash has still gone.
• Adding back recurring expenses: repetition undermines credibility.
• Double-counting depreciation or costs: reconcile every adjustment.
• Using one strong month: current evidence needs a meaningful period.
• Ignoring balance-sheet weakness: profit recovery may not restore cash.
• Assuming historic dividends remain sustainable: reserves and cash matter.
• Hiding liabilities or uncertainty: disclosure must be complete.
• Submitting public abbreviated data only: the lender may need full accounts.
• Writing an advocacy letter without documents: evidence is more persuasive.
• Applying before checking policy: many lenders will use standard loss-year rules.

When to Involve Willow

Refer the client when:

• the latest company accounts show a loss;
• a clearly identified non-recurring item caused or enlarged it;
• current managements show recovery;
• salary and dividends no longer reflect underlying performance;
• the client wants a high-value residential mortgage;
• retained profit may be relevant under specialist policy;
• the cost was non-cash but economically significant;
• company liquidity remains affected;
• the director needs to borrow before the next year-end;
• another application failed on the headline loss;
• the accountant can produce a reconciled adjustment bridge; or
• lender evidence requirements need checking before work is commissioned.

An anonymous outline should include loan type, historic results, latest loss, item description and amount, cash effect, completion status, current management profit, cash, debt, director income, current tax and timing.