The Financial Reporting Council (FRC) has published a thematic review on the use of alternative performance measures (APMs) by UK listed companies. It says that companies need to be more transparent about their use, and linkage to their IFRS or UK GAAP results.
APMs are financial measures that are not required as part of an issuer’s reporting obligations, but which are presented voluntarily by an issuer as an aid to understanding the performance of its business. Examples of APMs include net debt, operating earnings and EBITDA.
The FRC report marks five years since the European Securities and Markets Authority (ESMA) issued its Guidelines on APMs. ESMA published its own report in December 2019 on the use of APMs and compliance with the guidelines (see our blog post here). The FRC expects listed companies to continue to apply the ESMA Guidelines following the end of the Brexit transition period.
Key areas for improvement highlighted in the report include:
- Definitions and relative prominence – Disclosures should clarify how each APM is calculated, ideally in a single location within the annual report. Companies should ensure that APMs are easily distinguishable from (and reconcilable to) GAAP measures and are not presented so that APMs appear to have more weight than their GAAP equivalents.
- Rationale for APMs used – Companies should explain why each APM is specifically relevant to the company, including the extent to which that APM is used internally. Any reference to APMs measuring “underlying performance” or similar terms should explain precisely what the company means by this terminology.
- Adjustments – Companies should explain that APMs may present a more favourable view of performance when compared to GAAP results as a result of adjustments or exclusions. Disclosures should include a clear explanation justifying such adjustment or exclusion and refer to the relevant accounting policy.
- Role of the Audit Committee – The FRC expects Audit Committee reports to explain the Committee’s oversight, monitoring and challenge in relation to the formulation and use of APMs. Companies should include comparatives and ensure APMs are presented consistently over time to highlight longer-term trends.