One of the proposals’ most headline-grabbing aspects is the new concept of “management performance measures,” defined as:
- subtotals of income and expenses that:
- (a) are used in public communications outside financial statements;
- (b) complement totals or subtotals specified by IFRS Standards; and
- (c) communicate to users of financial statements management’s view of an aspect of an entity’s financial performance.
The proposals require that such measures “faithfully represent aspects of the financial performance of the entity to users of financial statements; and be described in a clear and understandable manner that does not mislead users.” They also require the following:
- An entity shall disclose information about any management performance measures in a single note to the financial statements. That note shall include a statement that the management performance measures provide management’s view of an aspect of the entity’s financial performance and are not necessarily comparable with measures sharing similar descriptions provided by other entities. In addition, for each management performance measure an entity shall disclose in the notes:
- (a) a description of why the management performance measure communicates management’s view of performance, including an explanation of:
- (i) how the management performance measure is calculated; and
- (ii) how the measure provides useful information about the entity’s performance;
- (b) a reconciliation between the management performance measure and the most directly comparable subtotal or total (defined elsewhere in the standard);
- (c) the income tax effect and the effect on non-controlling interests for each item disclosed in the reconciliation required (above); and
- (d) how the entity determined the income tax effect required…
An accompanying news release summed up the point of this as follows: “These requirements would add much-needed transparency and discipline to the use of non-GAAP measures and make it easier for investors to find the information they need to make their own analyses.” Countless times on this blog, we’ve covered the recurring concerns about such measures – that they undermine the amounts reported in the primary financial statements, that they’re not comparable from one entity to the next, that they tend to overstate the positive (providing a “sugar high” in IASB Chair Hans Hoogervorst’s phrase), that they’re not within the scope of the auditors’ report, and so on. Canadian regulators have had their eye on the issue for years (their rule-making initiative on the topic recently came back to life), and Canadian practitioners will immediately detect a strong similarity between the IASB’s proposals and the current content of CSA Staff Notice 52-306: for example, in the requirement to provide a reconciliation to a defined IFRS-compliant reference point. The big step forward is the (to be hoped) additional rigour and credibility and so on that flows from mandatorily importing such material into the financial statements.
That isn’t to say the proposal would address all the existing concerns. As acknowledged in the extract above, an entity might still calculate a management performance measure in a way that doesn’t exactly correspond to the method applied by its peers: even if the new proposals made this easier to detect, the lack of comparability would remain. The IASB considered trying to approach the topic more restrictively, but concluded among other things that any restrictions might prevent entities from disclosing industry-defined performance measures, and would be inconsistent overall with the objective of providing management’s view of performance.
Also, by focusing on income statement subtotals, the proposals exclude other kinds of “non-GAAP” measures that may be problematic to users. It provides the following examples:
- (a) individual items or subtotals of only income or expenses (for example, adjusted revenue as a stand-alone measure);
- (b) assets, liabilities, equity or combinations of these elements;
- (c) financial ratios (for example, return on assets);
- (d) measures of growth;
- (e) measures of liquidity or cash flows (for example, free cash flow); or
- (f) non-financial performance measures.
These will continue to be addressed (if at all) by country-to-country regulatory initiatives.
Another risk, perhaps, is that companies might provide one, somewhat sanitized, set of management performance measures in the notes to their statements, while using a different, more (say) aggressively self-serving set in news releases or elsewhere. On that topic, the proposals specify: “Only subtotals that management uses in public communications outside financial statements, for example, in management commentary, press releases or in investor presentations, meet the definition of management performance measures.” The Board comments that “it is hard to justify that a measure, in management’s view, communicates performance if an entity is not using it in communicating performance; and it would be confusing if one entity were to provide two sets of management-defined measures, one within and one outside the financial statements.” Presumably, any such game-playing will be of extreme interest to future regulators.
Anyway, that hardly exhausts the topic, but we’ll leave it there for this time.
The opinions expressed are solely those of the author