17 Mar 2014
Regulators and standard-setters are thinking hard about alternative performance measures and further guidance via standard setting or regulation may not be comfortable for the preparer community. Peter Hogarth, a partner in PwC’s Accounting Consulting Services, looks at recent developments
The presentation of financial performance can be a battlefield where preparers of financial statements sally forth to meet the regulators and standard-setters. Preparers, understandably, want to tell their story with a natural tendency to highlight the positive and pass quickly over any failures. Regulators worry that the reader might be misled. Some regulators have responded by taking a hard line and imposing a standard format for the income statement, with no additional sub-totals or analysis; a sort of uniform score card.
Elsewhere, creativity has flourished. Companies use columns, boxes, sub-totals and typeface to focus attention on ‘underlying’ or ‘sustainable’ earnings. This approach, the use of ‘non-GAAP’ measures, has its merits, but is not without its critics beyond the regulatory community.
How do the parties line up?
The standard setter
Hans Hoogersvoorst, IASB Chairman, said in a recent speech ‘no single line can capture everything about a company’s performance that a user will need’. He was weighing in on the other comprehensive income versus net income debate.
The IASB is working on a broader project on disclosure. The tip of the iceberg has appeared with an exposure draft on the first stage, but much more will follow from the IASB on this topic.
Meanwhile, the European Securities and Markets Authority (ESMA) went to the IFRS Interpretations Committee with question on non-GAAP measures.
The IC declined to enter the fray, declining the agenda request and booting the entire subject to the IASB.
ESMA has gone for a multi-pronged approach; publishing draft guidelines for listed companies that build on earlier recommendations from ESMA's predecessor body.
The UK’s Financial Reporting Council (‘FRC’) is looking for merits on both sides of the debate. It recently reminded management of the need to improve the reporting of alternative performance measures and ensure consistency in their presentation.
The FRC isn’t opposed in principle to non-GAAP measures but expects them to provide users with additional useful, relevant information. Recent enforcement actions by the FRC have challenged the ‘balance’ of alternative measures as well as the consistency and clarity of disclosures around one-off or 'exceptional' items.
The Australian Financial Reporting Council, however, has lined up for the uniform score card, making it clear that non-GAAP measures belong outside the financial statements altogether unless required by IFRS.
And everyone else?
Others have been weighing in. Few investors surveyed by PwC said they would ban non-GAAP measures, but they would like some ground rules.
A Standard & Poor’s study highlighted that adjusted profit measures may often give investors a misleading impression of performance. Adjusted profit measures are seen to outnumber the unadjusted measures. S&P also commented on the frequently seen ‘recurring’ non-recurring charges. The International Federation of Accountants has just issued a consultation on the same topic.
Non-GAAP measures are high on the agenda of regulators and standard setters. Users want to paint a picture of sustainable earnings, but will continue to question the preparation and balance of these measures. Will we see dramatic changes in current practice? The only ‘highly probable’ outcome – the debate will rage on.
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