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Proposed developments in corporate performance reporting

Financial Reporting Brief February 2020

This article looks at proposed developments in performance reporting and the role alternative performance measures can play.

Corporate Reporting - Delivering the Message


The responses to the Agenda Consultation carried out by the International Accounting Standards Board (IASB) revealed that respondents wanted the IASB to prioritise projects that are important to users of financial statements, including the disclosure initiative and the primary financial statements project.

A major move forward was made with this just before the end of 2019 with the publication of the exposure draft of a new standard ‘General Presentation and Disclosures’ that is intended to replace IAS 1 ‘Presentation of Financial Statements’.

The prime objective is to improve how information is communicated in the financial statements with a focus on information about performance in the statement of profit or loss. There is a strong need to respond to investor concerns about the comparability and transparency of companies’ performance reporting.

Within the overall context of responding to investors’ concerns, there have been other developments including, in December, the European Securities and Markets Authority (ESMA) published a report on the use of Alternative Performance Measures and on compliance by companies with ESMA’s APM Guidelines. The report addresses the following key topics – (1) use of APMs in management reports, ad hoc disclosures and primary financial statements, and (2) compliance of issuers with the Guidelines in management reports, ad-hoc disclosures and prospectuses.

The prevalence of APMs and Key Performance Indicators is demonstrated in the Deloitte review of the Annual Reports of 100 listed entities in the UK market on which they reported in October 2019. Of the 100 companies, 93 presented APMs in an up front highlights section with 88 including an adjusted measure of profitability.

Both investors and management can be said to be looking for a “magic number”: a measure of profit that gives them the information that they need. Does this exist, or perhaps there is more than one candidate. A strong candidate is IFRS profit. That is the result based on common requirements that is comparable between companies. Investors do want the IFRS number, but they generally also want adjusted profit measures to inform valuations, performance comparisons and earnings forecasts amongst other things.

Proposed New Standard
Some of the main features of the proposed new Standard are:

  • The introduction of defined subtotals and categories in the statement of profit or loss, with the aim to provide more relevant information and a more consistent, comparable structure with the following highlights:
    • Possibly the single most significant proposal is to present an operating profit or loss subtotal in the statement of profit or loss, which is clearly defined
    • Entities are also required to present separately ‘integral’ and ‘non-integral’ associates and joint ventures in statements of financial performance and cash flows
  • The introduction of requirements to improve aggregation and disaggregation
    • Remove the free choices regarding the analysis of operating expenses
    • Identify assets, liabilities, equity, income and expense that arise from events or transactions with shared characteristics that may be separately presented and disclosed in the financial statements
    • Define unusual income and expenses with limited predictive value that may reasonably be expected not to arise for several future annual periods
  • Introduction of Management Performance Measures (MPMs) and accompanying disclosure in financial statements
    • Require disclosure in the notes of subtotals of income and expenses that are used in public communications with users of financial statements and may communicate management’s view of an aspect of performance 
    • MPMs can be non-financial performance measures or financial performance measures that would be accompanied by appropriate disclosures in the notes to the financial statements 
  • Introduction of targeted improvements to the statement of cash flows
    • Require entities to use operating profit as the single starting point for the indirect reconciliation 
    • Remove the classification options for interest and dividends

The Deloitte publication IFRS in Focus provides commentary and observations on the proposed new Standard. 

Alternative Performance Measures
The ESMA Guidelines, published in 2015,  are aimed at promoting the usefulness and transparency of APMs included in prospectuses or regulated information. Adherence to the Guidelines will improve the comparability, reliability and or comprehensibility of APMs. The Guidelines describe an APM as a financial measure of future or historical financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.

The following needs to be taken into account:

  • Issuers should define the APMs used and their components as well as the basis of calculation adopted
  • Issuers should disclose the definition of all APMs used and they should be given clear, meaningful labels
  • A reconciliation of the APM to its nearest GAAP item should be disclosed
  • Issuers should explain the use of APMs in order to help users to understand their relevance and reliability
  • APMs should be accompanied by comparatives with accompanying reconciliations
  • The definition and calculation of an APM should be consistent over time

To be credible, APMs should supplement the information in the financial statements rather than compete with it. There needs to be discipline around their presentation.

An important part of the communication between a company and its investors, APMs can help investors understand the measures used to hold management to account. In an economy that has moved from an industrial base to one driven more by the Boardtechnology and information, they can help explain values within a company not captured in the GAAP amount. APMs can also help investors understand the financial effect of what are clearly unusual events that have impacted a company.

In order to promote investor protection, ESMA and the European Enforcers have continuously monitored European issuers’ implementation of the Guidelines since their inception. In 2019 ESMA reviewed the management reports of 123 issuers and found that only 16 comply with all principles of the APM Guidelines in relation to the APMs used. With regard to ad-hoc disclosures, of 106 issuers sampled, only 10 fully comply with the APM Gudelines.

When analysing compliance with the Guidelines, overall ESMA observed a good level of compliance in relation to the principles on comparatives, consistency and the unbiased nature of the APMs reported. On the other hand, shortcomings were identified in relation to compliance with the principles regarding explanations,reconciliations and definitions.

The proposed new Accounting Standard responds to the strong demand from investors for the Board to improve performance reporting, with greater transparency and comparability called for.

Many believe that APMs serve a useful purpose in telling a company’s story. Compliance with the Guidelines is important to achieve comparability. They should not be given greater prominence than the associated IFRS Measures.

Delivering the message in the most transparent manner to investors and other stakeholders is of paramount importance.

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