IASB tackles a variety of ‘non-GAAP’ measures
A new standard to improve financial statements communication might be coming up
Comparability is at stake
Have you often been confused while trying to find the operating profit in financial statements or even more trying to understand the performance metrics used by companies?
Well, there is hope. With its exposure draft on 'General Presentation and Disclosures', the IASB is tackling the variety of performance measures (the so-called non-GAAP measures) used by companies to show management’s view on their core business. Non-GAAP financial measures are often reported in the management’s discussion and analysis (MDA) section of financial report filings, as well as in earnings releases and other forms of communication that companies use to provide additional insight into their business beyond the financial statements.
Many of these companies disclose unusual or similarly described expenses to steer information about what they consider as their underlying or normalized earnings. Some of them do the same with any unusual income. The way, however, entities provide this information varies significantly and for many readers or investors, it is unclear how and why certain items have been identified as unusual, or how they have been measured.
The flexibility that companies have in what they report and how they report it is a growing concern, as non-GAAP financial measures may be misleading or difficult to interpretMario Matthys
No doubt non-GAAP financial measures are useful for understanding a company’s underlying performance as they typically eliminate items deemed transitory, uncontrollable, or irrelevant by management. Non-GAAP measures supplement a company’s financial statements as they provide additional information that may be helpful in assessing the business. However, the flexibility that companies have in what they report and how they report it is a growing concern, as non-GAAP financial measures may be misleading or difficult to interpret. Moreover, it can be expected that the impact of the current Covid-19 crisis will not benefit the presentation of consistent and reliable financial measures.
Scanning the most recent press releases on the 2019 FY results of some Bel20 companies shows the use of performance metrics such as recurring/underlying/adjusted/normalized Revenue/EBIT/ EBITDA/Profit, free cash flow, non-recurring items, all having a variety of reconciling items between these non-GAAP measures and their IFRS counterpart.
On top comes the adoption of IFRS 16 where the lease costs are mainly replaced by amortization and financial charges and for which certain companies apply adjusted comparatives (“rebased recurring Ebitda”); others not. Are you still following?
Comparability is at stake. Try to compare 2 competitors with different bases or different non-GAAP performance metrics.
As already mentioned, the unprecedented Covid-19 crisis will be more pertinent than ever for the result announcements to come in 2020 and beyond: under which performance measures companies are going to report the exceptional negative impacts of Corona that killed their “business-as-usual” 2020 KPIs?
Time to reflect on results presentation.
The objective of this new exposure draft is not only to specifically tackle the non-GAAP measures but to improve how information is communicated in the financial statements in general. Below is a summary of the most important proposals:
Digital analytics is getting in trouble with the increasing use of different performance measures.Mario Matthys
The IASB has been discussing this already quite some time. The increasing digital consumption of financial data is certainly one of the main drivers of this exposure draft. How many readers still grab a hard copy of a financial report? Digital analytics is getting in trouble with the increasing use of different performance measures.
However, an exposure draft means no standard yet. It will take a considerable time before this draft turns into a mandatory standard. Then you need to give the reporters some time to adopt. It will not be there tomorrow. The current Covid-19 crisis might however change the speed of adoption. In any case, better be prepared than surprised. But better be prepared than surprised.