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Additional performance measures - Coggle Diagram
Additional performance measures
Introduction
Many jurisdictions have enforced a standard format for performance reporting
with no additional analysis permitted on the face of the Statement of Profit or Loss
Others have allowed entities to adopt various methods of conveying the nature of ‘underlying’ or ‘sustainable’ earnings
varies from the disclosure of additional key performance indicators of the business
to providing more information on individual items within the financial statements
they allow investors to gain a better understanding of an entity’s financial statements and evaluate the entity through the eyes of the management
can assist users in making investment decisions, but they do have limitations
can help enhance users’ understanding of the company’s results
can also be an important instrument for easier comparison of entities in the same sector, market or economic area
Common practice
example
normalised profit
earnings before interest and tax (EBIT)
earnings before interest, tax, depreciation and amortisation (EBITDA)
These alternative profit figures can appear in various communications, including company media releases and analyst briefings.
Alternative profit calculations normally exclude particular income and expense items from the profit figure reported in the financial statements
there could be the exclusion of income or expenses that are considered irrelevant from the viewpoint of
the impact on this year’s performance, or
when considering the expected impact on future performance.
example, gains or losses from changes in the fair value of financial instruments
The exclusion of interest and tax helps to distinguish between the results of
entity’s operations
impact of financing and taxation
Misleading
Due to
bias in calculation
inconsistency in the basis of calculation from year to year
inaccurate classification of items
as a result, a lack of transparency
Often there is little information provided on
how the alternative profit figure has been calculated or
how it reconciles with the profit reported in the financial statements
are also often described in terms which are neither
defined by issuers, nor
included in professional literature and thus cannot be easily recognised by users
APMs include
all measures of financial performance not specifically defined by the applicable financial reporting framework
all measures designed to illustrate the physical performance of the activity of an issuer’s business
all measures disclosed to fulfil other disclosure requirements included in public documents containing regulated information.
Telecom Italia Group
An example demonstrating the use of APMs
year ended 31 December 2011
non-IFRS APMs used
EBITDA
useful unit of measurement for evaluating the operating performance of the group and the parent
Organic change in revenues, EBITDA and EBIT
express changes in revenues, EBITDA and EBIT
excluding
effects of the change in the scope of consolidation
exchange differences and non-organic components constituted by non-recurring items
other non-organic income and expenses
The organic change in revenues, EBITDA and EBIT is also used in presentations to analysts and investors
Net financial debt
represented by
gross financial debt less
cash and cash equivalents and
other financial assets
The report on operations includes two tables showing
amounts taken from the statement of financial position
and used to calculate the net financial debt of the group and parent
Adjusted net financial debt
exclude effects that are purely accounting in nature resulting from
fair value measurement of derivatives
fair value measurement of derivatives
Evaluating the aims
(IASB) is undertaking an initiative to explore how disclosures in IFRS financial reporting can be improved
initiative is made up of a number of projects, which include
adding an explanation in IAS® 1
adding an explanation in IAS® 1
with examples, of how IAS 1 requirements are designed to shape financial statements instead of specifying precise terms that must be used
This includes whether subtotals of IFRS numbers such as EBIT and EBITDA should be acknowledged in IAS 1
APMs appear to be used by some issuers
to present a confusing or optimistic picture of their performance by removing negative aspects
There seems to be a strong demand for guidance in this area
but there needs to be a balance between
providing enough flexibility
ensuring users have the necessary information to judge the usefulness of the APMs
European Securities and Markets Authority (ESMA)
has launched a consultation on APMs
aim
improve the transparency and comparability of financial information while reducing information asymmetry among the users of financial statements
also wishes to improve coherency in APM use and presentation and restore confidence in the accuracy and usefulness of financial information
guidance for the presentation of APMs and consistency in using APMs
Include
Issuers should define the APM used, the basis of calculation and give it a meaningful label and context.
APMs should be reconciled to the financial statements.
APMs that are presented outside financial statements should be displayed with less prominence.
An issuer should provide comparatives for APMs and the definition and calculation of the APM should be consistent over time.
If an APM ceases to be used, the issuer should explain its removal and the reasons for the newly defined APM
However, these guidelines may not be practicable when
the cost of providing this information outweighs the benefit obtained or
Issuers will most likely incur both implementation costs and ongoing costs
Most of the information required by the guidelines is already collected for internal management purposes, but may not be in the format needed to satisfy the disclosure principles
However, ESMA believes that the costs will not be significant because APMs should generally not change over periods
Therefore, ongoing costs will relate almost exclusively to updating information for every reporting period
information provided may not be useful to users
application of these guidelines will improve
understandability
relevance
comparability of APMs
enable users to understand the adjustments made by management to figures presented in the financial statements
this information will help users to make
better-grounded projections
estimates of future cashflows
assist in equity analysis and valuations
increase the level of disclosures
but should lead issuers to provide more qualitative information
The national competent authorities will have to
implement these guidelines as part of their supervisory activities, and