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Alternative performance measures: a recurring debate

Alternative performance measures - FRC reporting

A look into how recent regulator focus on the clarity of explanations of alternative performance measures continues to divide opinion.

Nick Chandler


KPMG in the UK


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Alternative performance measures - a recurring debate - a hand holding a green tick paddle

The topic of alternative (or non-GAAP) performance measures (APMs) regularly appears in the financial press. This is understandable given the varied uses for, and opinions on, such measures.

We look at how recent regulator focus on the clarity of explanations of APMs fits into the recurring debate.

A magic number

Both investors and management can be said to be looking for a “magic number”: a measure of profit that gives them the information that they need. The problem is that this doesn’t exist in the same form for everyone: in reality, there is more than one magic number.

A strong candidate for one of various potential “magic numbers” is IFRS profit. That is the result based on common requirements that is comparable between companies. Investors do want the IFRS number, but they generally also want adjusted profit measures to inform valuations, performance comparisons and in earnings forecasts amongst other things. Management also want a profit measure – their own “magic number” - that helps them explain performance to investors, allows operational performance monitoring, and against which they can be judged.

Controversy then arises for two main reasons: not all of these varied information needs are met by one number, and there are differing views on what adjustments to IFRS are – or are not – appropriate.

We know that many investors themselves adjust the adjusted measures that companies provide. However, there is no consensus among investors on what adjustments are appropriate. Opinion varies, for example, on whether it is appropriate to exclude items that are non-cash; non-recurring; or outside of management’s control. This is highlighted in a CFA Institute report on investor uses of non GAAP measures: a fascinating ‘long read’ for those interested in understanding the varied information needs of investors.

Information about the adjustments management have made to IFRS is therefore vital to support investors in making their own choices and in understanding those of management.

Management’s explanations: a clear starting point

In this context, guidance from ESMA , and the Financial Reporting Council (FRC) over the past few years seeks clear explanations of the relevance, purpose and use of APMs. The FRC’s 2017 thematic review on APM presentation, in particular, emphasises the importance of explaining the rationale for each individual adjustment to IFRS.

However, companies can sometimes struggle to explain APMs clearly. That isn’t really surprising given the lack of consensus over what adjustments and measures are relevant. The best explanations will be company-specific ones that capture the relevance and overall purpose of the measure, as well as explaining why items are excluded. “Boilerplate” short-hand terms such as “one-off” or “more meaningful” don’t add value without further explanation.

The Financial Reporting Council is concerned that terms such as “one off” or “non-recurring” imply that an expense (it is usually an expense) won’t happen again. Impairments and restructurings, for example, do happen repeatedly in global groups. Why is that item really excluded? Could it be that such charges are volatile, occurring regularly but in significantly different amounts such that a year-on-year comparison of performance can only be explained by separating those items out for discussion? Or perhaps they represent strategic shifts: relevant for the performance of the group as a whole, but less relevant for considering day-to-day operating performance? There may be other reasons. Clear articulation helps users understand management’s rationale.

The recurring debate

Clear disclosure of the rationale for specific APMs is a step in the direction of greater shared understanding of different versions of the “magic number”. The content of these measures - what adjustments are or are not appropriate –continues to divide opinion. The quality of explanations should improve the quality of this recurring debate.

KPMG’s Better Business Reporting group can help align corporate reporting to what is important to your business and users.

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