Let’s return to the IFRS 18 concept of management-defined performance measures.

You’ll recall that the new standard defines such a measure as ‘a subtotal of income and expenses that an entity uses in public communications outside financial statements; to communicate to users of financial statements management’s view of an aspect of the financial performance of the entity as a whole, excluding various defined items. IFRIC recently received a request asking whether a performance measure that includes hypothetical income and expenses can meet the definition of a management-defined performance measure in IFRS 18; for this purpose it defined hypothetical income and expenses as income and expenses that an entity has not recognized and will never recognize in its statement of financial performance applying IFRS Accounting Standards.

In case one has trouble following how such an issue could ever arise, the underlying staff paper provided some examples:

• Annualized rental income minus non-recoverable property expenses (such as service charges and ground rent). This measure is used in the real estate industry as a numerator to calculate the yield on a property. The annualized rent is calculated by multiplying the rental income for the last month of the reporting date as recognized in accordance with IFRS 16 times twelve months. If the property was owned and leased out during the reporting period, this might be different than the recognized IFRS 16 rental income for the reporting period (for example, due to rent increases agreed during the reporting period)…
• Net profit excluding the effects of a major crisis, such as a pandemic or a geopolitical conflict. The entity estimates its income and expenses that it would have generated and incurred if that major crisis had not happened. This may include removing recognized income and expenses (which are not considered ‘hypotheticals’) but also adding estimated income and expenses (which are considered ‘hypotheticals’).
• Pro forma gross profit as if the business combination happened at the beginning of the reporting period. The pro forma gross profit comprises the revenue and cost of sales recognized and measured in accordance with IFRS Accounting Standards for the combined entity as if the business combination happened at the beginning of the reporting period. This measure is not specifically required by (IFRS 3) and because it includes gross profit before the acquisition date, this is not a subtotal as described in paragraph 118(a) of IFRS 18…

Extracts from the Committee’s discussion:

• Paragraph 117 of IFRS 18 states that a ‘management-defined performance measure is a subtotal of income and expenses…’. The Committee observed that this paragraph contains no restrictions on how an entity calculates a subtotal of income and expenses that is a management-defined performance measure. Consequently, this paragraph does not restrict an entity from including income and expenses that are not, and will not, be recognized in the entity’s statement of financial performance applying IFRS Accounting Standards.
• …In considering faithful representation, an entity assesses whether information disclosed in financial statements faithfully represents what the information purports to represent.
• The objective of disclosures about management-defined performance measures…includes providing information to help a user of financial statements understand the aspect of financial performance that, in management’s view, is communicated by a management-defined performance measure…’An aspect of the financial performance of the entity as a whole’ should not be read independently of ‘management’s view’.
• As explained in…the Basis for Conclusions accompanying IFRS 18, in the context of management-defined performance measures, faithful representation does not provide information about whether a measure is a ‘good’ or ‘bad’ measure.

The Committee tentatively concluded then that a performance measure including such hypothetical income and expenses can be a subtotal of income and expenses and can faithfully represent what it purports to represent. In that case, if the measure meets all the relevant criteria in IFRS 18, then it’s a management-defined performance measure and the entity discloses the information for such measures required by the standard. This may be seen as a “good thing” in that it submits such measures, despite their hypothetical aspects, to the same rigour (and audit oversight) as other, more historically-rooted MPMs. It might seem though to have a rather perverse consequence, of forcing the financial statements to give prominence to “made-up” numbers which are really better off left in other communications, if they have to be anywhere at all. But perhaps the dynamic (at least in some of the more extreme history-bending cases, such as the above-noted calculations of what net profit might have looked at if a particular event hadn’t happened) will sometimes work the other way, to dissuade companies from calculating and disseminating such numbers in the first place. Anyway, the tentative agenda decision is open for comment until September 9, 2026: one imagines it might attract a greater volume of responses than some do…

The opinions expressed are solely those of the author.