Management performance measures – much-needed transparency and discipline (once they fix a few things)

It’s been a while since we mentioned the IASB’s exposure draft General Presentation and Disclosures, so let’s dip into it today.

The comment period closed on September 30, 2020, after being extended because of covid-19. One of the headline-grabbing proposals was a new definition of “management performance measures,” defined as follows:

  • 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 exposure draft proposes: “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.” It goes on to prescribe requirements for disclosing the definition and usefulness of the measure, and for providing a reconciliation to the most directly comparable measure in the primary financial statements.

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. The IASB certainly acknowledged that the proposals wouldn’t address all the existing concerns, and, well, based on my brief review of a tiny portion of the 215 (!) comment letters they received, it seems to have been correct.

Not everyone even buys into the basic premise, for example British American Tobacco:

  • Including Management Performance Measures within the financial statements so that they are covered by the requirements of IFRS and so that potentially misleading information is not provided outside the financial statements…does not take account of the regulatory environments (or multiple regulatory environments) that the reporting entity’s accounts and additional information are subject to, and does not take account of audit regimes requiring additional information out with the financial statements to be consistent with and not contradictory to the information in the financial statements.

The Chief Accountants Committee of the Canadian Securities Administrators broadly accepted that the proposal “may improve the relevance of financial statements,” but followed this up with a long list of problems:

  • the notion of “complement” would be difficult to “operationalize and enforce”
  • the proposal “does not explain what constitutes public communication…(for example) does public communication include all required and voluntary communication in paper and electronic form?
  • “…using the term “performance measure” may cause confusion, particularly for stakeholders who are unfamiliar with the accounting standards, and for entities subject to securities legislative requirements relating to other performance measures that are not captured by the ED definition.”
  • it is unclear how an entity would apply the underlying requirement that such measures “faithfully represent aspects of financial performance of an entity to users of financial statements…” “In particular, we note that the 2018 conceptual framework description of faithful representation encompasses the characteristics of complete, neutral and free from error. In our experience in reviewing the disclosure of these types of measures, they involve adjustments to amounts recognized and measured in accordance with IFRS and predominantly present more favourable results than the most comparable IFRS measures. Thus, it is questionable whether such measures are neutral..”

And that’s not a complete list of the problems they identified (I think the only bits they left intact were the occasional “and” and “the”). They also referred to the challenges for auditors and audit committees. Ernst & Young expanded on the former in its letter:

  • When MPMs are defined in reference to being published outside financial statements, the auditor will have to search through all other communication issued by the entity in order to conclude on the completeness of the required disclosures in the financial statements. This may be an onerous requirement, potentially having consequences for the scope of the audit.

But then, if the meal is questionable, there may still be complaints about the small portions. This is from the Canadian Accounting Standards Board:

  • We note that a significant number of the management-defined performance measures that users rely on will not meet the proposed definition of a management performance measure. To ensure that useful information about financial performance is captured within the financial statements, we recommend that the IASB consider expanding the scope of its proposals to include additional measures, such as financial ratios and measures that complement totals and subtotals in the other primary financial statements.

The current work plan indicates that a summary of the responses to the exposure draft may be issued in December 2020. I quoted above from just 4 letters (and then only on a small piece of their overall content). Did I mention there are 211 others?

The opinions expressed are solely those of the author

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