Alternative Performance Measures (APMs) have become well established in the communication of Switzerland’s 30 largest companies. In May 2017, the Swiss regulator SIX Swiss Exchange published a draft of a directive on APMs to encourage their transparent use. In view of the SIX regulations to be expected in Switzerland, this study analyzes to what degree the requirements of the directive have already been implemented in the financial communication of 2016 and 2017, and where there is room for improvement.
Alternative Performance Measures (APMs) have become well established in the communication of Switzerland’s 30 largest companies. Two thirds of the companies in the Swiss Leader Index (SLI) reported non-GAAP earnings measures in the financial year 2016. Usually these are placed quite prominently in the ’key highlights’ section of financial reports or in the headings of earnings press releases.
The average SLI-listed company reported two non-GAAP measures in financial year 2016 and 2017. In 85% of the investigated cases, the reported APM is higher than the associated GAAP item, on average by 67.5%. This gives rise to suspicions that the company’s performance is being embellished or even of investor abuse, especially if the adjustments undertaken are dubious in character or have not been communicated transparently. Trust is at stake.
Against this backdrop, it is not surprising that the Swiss regulator SIX Swiss Exchange (SIX) has taken action. In May 2017, it published a draft of a directive on APMs to encourage their transparent use. The proposed directive focuses primarily on the consistent, comprehensible and transparent use of APMs. In addition, emphasis is put on a balanced presentation of GAAP and non-GAAP numbers as well as on the provision of comparative information.
On the whole, this study shows that the majority of reporting companies are eager to provide transparency in regard to the adjustments made. Indeed, some companies have already fully or partially implemented the directive that is still in the pipeline. They can serve as valuable benchmarks. Nevertheless, many companies still have to rethink their current reporting to create the required transparency and comparability. Thus, there is still room for improvement in communicating and embedding APMs as well as in providing concise definitions and fundamentals for calculations and reconciliations.
Behind the curtain, the internal policies, process designs and governance structures appear diverse. As a consequence, increasing transparency will naturally lead to companies having to revise their policies and processes in many cases with respect to their APM reporting. A superficial brush-up of the currently used reporting will not be sufficient to meet the new requirements in the long run. An in-depth review and new conceptualization of the individual corporate reporting would also make sense in view of the forthcoming changes caused by IFRS and US GAAP (specifically concerning disclosures and the treatment of revenue recognition, leasing contracts and financial instruments). This is therefore an ideal moment to rethink the annual reporting from the ground up.
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