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Underlying profit measures under scrutiny

Deloitte survey suggests change may be needed to meet the FMA’s expectations

Results of the 2012 Deloitte New Zealand Financial reporting Survey suggest that the disclosure of alternative profit measures in annual reports may need some revision, in light of the Financial Markets Authority’s (FMA) proposed new guidance on non-GAAP financial information.

“Explaining a company’s performance and in particular its sustainable earnings to investors can be a real challenge. The FMA’s proposed guidance sets out the key principles that underpin how and why such information should be presented,” says Deloitte partner Denise Hodgkins.

This year Deloitte’s annual survey of 100 listed and other large companies with publicly available information showed 89 referred to alternative profit measures in addition to “bottom line” statutory profit in their 2011 annual reports.

In total, 250 alternative profit measures were used by the companies, including ‘earnings before interest, tax, depreciation and amortisation’ (EBITDA), ‘distributable profit’, ‘operating profit’ and ‘underlying earnings’. This is an increase on 214 measures disclosed in the prior year survey.

“With more than 50% of the companies providing three or more alternative measures of profit, companies may need to reflect on which key measures best represent the performance of the company,” says Ms Hodgkins.

“Contrary to the FMA’s proposed guidance, the survey also found that 27 companies discuss their underlying profit more prominently than their statutory profit in the annual report so some changes will be needed in this respect.”

In addition, further clarity could be provided for investors by explaining the reason for using the alternative measures, particularly since 86% of measures show an improved result.

“As the FMA finalises its guidance, we urge Directors to take the opportunity to reconsider how best to communicate the performance of the company to investors, and to draft an internal policy on how this information will be presented in annual reports and other investor communications.”

To see the annual Deloitte Financial Reporting Survey series, go to www.deloitte.com/nz/financialreportingsurvey.

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