IFRS 18 Series – Part 2: Management-defined Performance Measures

One of the key new concepts introduced by IFRS 18 is Management-defined Performance Measures (MPMs). Many entities already communicate adjusted or non-GAAP performance measures in investor presentations, annual reports and other public communications. IFRS 18 brings greater discipline and transparency to how some of these measures are reported.

The new requirements recognise that investors often find management's own performance measures useful as these measures provide insight into how management assesses the business. Investors have also raised concerns about inconsistent definitions, limited transparency and a lack of comparability between entities. IFRS 18 addresses these concerns by requiring qualifying measures to be explained and reconciled within the audited financial statements.
 

What is a Management-defined Performance Measure (MPM)?

IFRS 18 defines an MPM as a subtotal of income and expenses that:

  • is used in public communications outside the financial statements
  • communicates management's view of an aspect of the financial performance of the entity as a whole
  • is not a subtotal specifically required by IFRS Accounting Standards or one of the subtotals specifically excluded by IFRS 18

In practice, many MPMs are measures that stakeholders already recognise as alternative performance measures (APMs) or non-GAAP measures. However, not all APMs are MPMs. IFRS 18 applies only to a subset of those measures.

MPMs are limited to subtotals of income and expenses

A key feature of the definition is that an MPM must be a subtotal of income and expenses.

This means that measures such as free cash flow, net debt, debtor turnover, return on capital employed or EBITDA margin are not themselves MPMs because they are not subtotals of income and expenses.

Similarly, financial ratios are outside the scope of the requirements. However, where a ratio uses a qualifying subtotal, that subtotal may itself be an MPM. For example, if an entity presents "adjusted operating profit per share", the ratio is not an MPM, but the numerator "adjusted operating profit" may be, provided it meets the definition.

Which performance measures are excluded?

IFRS 18 recognises that certain performance subtotals are already widely understood and consistently used. Accordingly, these measures are excluded from the MPM requirements, even though they may not be explicitly defined elsewhere in IFRS Accounting Standards.

Examples include:

  • gross profit (and similar subtotals)
  • operating profit before depreciation, amortisation and IAS 36 impairment losses
  • operating profit and income and expenses from equity-accounted investments
  • profit before tax
  • profit or loss from continuing operations

Similarly, subtotals specifically required by IFRS Accounting Standards are not MPMs.

Consequently, entities should not assume that every adjusted profit measure requires the new disclosures. The first step is to determine whether the measure is already required or specifically excluded by IFRS 18.
 

Public communications

Another important element of the definition is that the measure must be used in public communications outside the financial statements. Although IFRS 18 does not define the term "public communications", it provides examples of documents that are within scope, including:

  • management commentary
  • investor presentations
  • press releases

Conversely, oral communications, transcripts of oral presentations and social media posts are not regarded as public communications for this purpose. This means that entities should consider all external communications collectively when identifying potential MPMs rather than focusing solely on the annual report.
 

New disclosure requirements

Where an entity identifies an MPM, IFRS 18 requires comprehensive disclosures to be presented in a single note to the financial statements.

For each MPM, an entity must disclose:

  • a description of the aspect of financial performance that management believes the measure communicates
  • an explanation of why the measure provides useful information
  • the method used to calculate the measure
  • a reconciliation to the most directly comparable subtotal specified by IFRS Accounting Standards

The reconciliation should clearly identify each reconciling item. For each item, entities are also required to disclose:

  • the related income tax effect
  • the effect on non-controlling interests, where applicable
  • how the income tax effect has been determined

The required disclosures for all MPMs must be presented together in a single note to the financial statements. This reflects the IASB's objective of providing stakeholders with a single, transparent location in which to understand management's performance measures and how they relate to IFRS-defined subtotals.

The note must also include a statement explaining that the MPMs represent management's view of the entity's financial performance and that similarly labelled measures presented by different entities may not be comparable.
 

Practical implications

Many entities already communicate adjusted performance measures as part of their external reporting. IFRS 18 does not prescribe which MPMs entities should present or how those measures should be calculated. Instead, it introduces a consistent disclosure framework that requires entities to explain those measures and reconcile them to the most directly comparable IFRS subtotal.

Preparers should begin by identifying all performance measures used across public communications and assessing whether they meet the definition of an MPM. Where they do, entities should ensure that robust documentation supports the calculation, reconciliation and explanation of each measure. Finance teams may also need to establish new controls to ensure consistency between investor communications and the audited financial statements.

Although the additional disclosures may increase reporting effort, they also provide an opportunity to improve transparency around management's performance reporting. By bringing these measures into the financial statements and requiring consistent disclosures, IFRS 18 seeks to enhance comparability and improve stakeholders' understanding of how management evaluates financial performance.
 

Helping you stay up to date on IFRS 18

To learn more about IFRS 18, visit our dedicated IFRS 18 page, where you will find our comprehensive implementation guide, IFRS 18 in Practice, together with sector-specific publications and practical insights. You can also refer to part 1 of this IFRS 18 series.

We also invite you to join our upcoming IFRS 18 webinar on 24 September, when our specialists will discuss the practical implications of the new presentation and disclosure requirements and answer questions from participants. The webinar recording will also be available.

For help and further discussion on how MPMs may affect your organisation, contact Charles Ellis.