Article:

FRC review of alternative performance measures

13 December 2016

The Financial Reporting Council (FRC) has published a thematic review (the Review) on Alternative Performance Measures (APMs or non-GAAP measures). The Review was conducted in light of concerns expressed about the use of such measures by a number of stakeholders and also by a number of commentators. In addition, the topic has been given added relevance by the issue of the European Securities and Markets Authority’s (ESMA) Guidelines on Alternative Performance Measures (the Guidelines). Companies that are listed on an EU-regulated market are required to make every effort to comply with the Guidelines which apply to all regulated information, including interim statements and annual reports, published on or after 3 July 2016.

The FRC indicates that it considers the Guidelines to largely represent a codification of what is needed for APMs to support a fair, balanced and understandable strategic report and of best practice in this area. Accordingly, to achieve continuous improvement in reporting, the FRC expects many companies to make changes in response to the Guidelines coming into force. It also suggests that it will assess whether APMs disclosed in strategic reports are consistent with the Guidelines and, where it finds material inconsistencies, it will write to the companies concerned. To that end, the FRC says that, in its reviews of 31 December 2016 reports and accounts, it will question companies where:

  • Good explanations for the use of APMs and for any changes made in the APMs used, including changes in definition, are not provided.
  • Good explanations of why items have been excluded from adjusted measures of profit are not provided and, in particular, where an item is excluded from adjusted profit that the FRC has not seen others exclude.
  • A description such as non-recurring is used and that description does not appear to apply in the circumstances.
  • There is no discussion of either the IFRS results themselves or of the adjustments made to those results to arrive at adjusted profit, or if the discussion of IFRS and non-IFRS measures is not balanced.
  • The IFRS results are not highlighted at an early point in the narrative.

The FRC emphasises that this is not a major change in its approach and should not lead to reports becoming less understandable, clear or concise but also highlights that it has previously stated that it has challenged companies where narratives focus only on ‘good news’ or if trend information is not sufficient to explain the effect of non-recurring items.

For help and advice on APMs please contact Richard Matthews.

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