FRC sets expectations on APMs and exceptional items in the context of the COVID-19 pandemic

11 June 2020

COVID-19 is likely to have had significant effect on the development, performance or position of most, if not all businesses, and companies will need to explain those effects in the strategic report and financial statements. In order to do this, new or amended Alternative Performance Measures (APMs) or ‘exceptional’ items will often be considered.

Last month we highlighted that the European Securities and Markets Authority (ESMA) had published an update Q&A document on the application of its 2015 ‘Guidelines on Alternative Performance Measures’. Following on from this, on 20 May 2020, the FRC issued its own guidance on the use of APMs and exceptional items in the context of the COVID-19 pandemic.

Exceptional items

As a headline, in respect of exceptional items, the FRC says that companies should:

  • Not disclose costs (sometimes described as ‘stranded’, ‘sunk’ or ‘excess’) as exceptional solely because of a reduction in, or elimination of, the related revenue streams due to the COVID-19 crisis; and
  • Not identify incremental costs as exceptional if they result in incremental revenue that is not also described as exceptional; for example, additional staff costs related to managing unusually high levels of sales of in-demand items.

It also expresses a view that splitting discrete items on an arbitrary basis in an attempt to quantify the portion relating to COVID-19 is unlikely to provide users with reliable information.

Alternative Performance Measures

The FRC makes clear that using APMs that attempt to provide a measure of ‘normalised’ or ‘pro-forma’ profit, excluding the estimated effect of the COVID-19 crisis, are likely to be highly subjective and, therefore, potentially unreliable. The FRC does not expect companies to provide these measures; for example, by including them in a ‘third-column’ income statement presentation.

As well as making its COVID-19-specific points, the FRC also reiterates a number of the more general expectations that it set out in its 2017 Thematic Review on the use of APMs. This Thematic Review remains the key source of general guidance and investor/regulator expectations in this area, which include that APMs:

  • Have clear and accurate labelling
  • Have an explanation of their relevance and use
  • Are reconciled to the closest GAAP measure, and
  • Are not given more prominence than the equivalent GAAP measures.

It is essential that the use of APMs and exceptional items results in the financial statements giving a ‘true and fair view’, the strategic report being ‘fair, balanced and comprehensive’, and the annual report as a whole providing relevant and reliable information to investors and other stakeholders. The material published by the FRC will help companies meet these statutory and commercial objectives, and will also serve as a clear and specific indication of the expectations its Corporate Reporting Review team will have when reviewing annual reports over the coming months.

Read the FRC guidance on APMs during COVID-19

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