The UK accounting regulator has warned companies about their use of non-standard metrics after a review found almost half had given too much prominence to measures such as “underlying” profits, whose meaning may be unclear to investors.
Alternative performance measures are used by companies to give shareholders additional information not included in the figures they are required to disclose under financial reporting standards.
But there are longstanding concerns that they may also present an unjustifiably favourable view of company performance.
The Financial Reporting Council, which did not disclose which companies’ annual reports were included in its review, found that APMs generally made companies look more profitable than the standard accounting measures they are required to report.
“We continue to find that companies adjust for more costs than income when calculating profit-based APMs,” the FRC’s review found.
The regulator said companies should be “even-handed in the treatment of gains and losses when classifying amounts as adjusting items” and should “avoid practices that systematically present a more favourable view of their adjusted results”.
The review will renew interest in APMs, which have previously come under scrutiny such as when WeWork reported its “community-adjusted ebitda”.
All but one of the 20 publicly listed companies whose annual reports were inspected by the FRC excluded more expenses than income from their APMs, meaning their “adjusted” results were more positive than their statutory figures.
In six of the 20 cases reviewed, companies had reported a loss under standardised accounting metrics but their adjusted results showed a profit.
The FRC said companies had generally provided good quality disclosures about their use of APMs but that some should do a better job of explaining the measures they used.
Many companies used terms such as “underlying profit”, “non-underlying items” and “core operations” but did not explain these terms, the regulator found.
Companies must stop presenting their APMs more prominently than standardised performance metrics, the watchdog said.
Almost half of the companies reviewed focused less on APMs than on the measures required under Generally Accepted Accounting Practice (GAAP) in some areas of their reporting, it found.
“While the use of APMs can provide investors and other users of accounts with valuable insights into companies’ overall performance, these supplementary measures should not be given greater focus than GAAP measures,” said Carol Page, director of the FRC’s corporate reporting review.
“Users of accounts should also be able to clearly understand how APMs have been calculated, the rationale for any adjustments and the inherent limitations of such measures,” she said.
Companies must also avoid indicating that APMs are superior to GAAP measures, the FRC’s report said, citing examples where companies had described them as “more meaningful”, “better”, “fairer”, “less distorted” or “more accurate”.
References to APMs such as “statutory net debt” and “statutory ebitda” should be revised because APMs cannot be statutory measures, the FRC said.
Companies had generally avoided adopting Covid-19-related reporting practices that the regulator previously discouraged, such as the presentation of “normalised” results excluding the estimated effect of the pandemic.
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