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News November 2016 Improved reporting of alternative performance measures welcomed but further enhancements needed

Improved reporting of alternative performance measures welcomed but further enhancements needed

25 November 2016

PN 67/16

The reporting of alternative performance measures (APMs) has improved according to the findings of a thematic review (PDF) published today by the Financial Reporting Council (FRC). However, further improvements are required. 
 
The review of 20 sets of 30 June 2016 interim statements was undertaken by the FRC’s Corporate Reporting Review (CRR) team. The review found that definitions and reconciliations were generally provided for APMs, and their descriptions were not misleading. However, explanations for the use of APMs were often cursory. The review also found that in one case the narrative discussed APMs only and made no mention of the related International Financial Reporting Standards (IFRS) results. Improvements were seen in 7 of the 20 statements compared to the companies’ previous interims. The improvements largely related to better explanations.
 
The thematic review was conducted following concerns expressed by a number of stakeholders, as well as the FRC in its recently published Annual Review of Corporate Reporting, and the coming into force on 3 July of the Guidelines on Alternative Performance Measures, issued by the European Securities and Markets Authority (ESMA).
 
In particular, the review looked at alternative measures of profit. 90% of the sample used such a measure of adjusted profit with the alternative measure being higher than the equivalent IFRS measure in 78% of those cases.
 
The review found that there was only limited commonality in the definition of such measures while some of the definitions used gave rise to concerns about why certain items, notably recurring restructuring costs, had been excluded from the measure.
 
The FRC will take account of the findings of the thematic in its review of reports and accounts for years ending 31 December 2016 onwards. In particular, the FRC notes that many companies will need to make further enhancements to their reporting in this area.
 
Geoffrey Green, Chairman of the FRC’s Financial Reporting Review Panel, and member of the Conduct Committee, commented:

“APMs are used by many companies to provide additional, valuable insights into companies’ financial results. However, companies must take care to ensure that such measures are clearly defined and reconciled and the reasons for their use explained. Discussion of APMs can never be a substitute for discussion of the results as determined in accordance with IFRS.”

  
Notes to editors:

1.    The FRC is responsible for promoting high quality corporate governance and reporting to foster investment.  We are the UK competent authority for audit and set the UK Corporate Governance and Stewardship Codes as well as UK standards for accounting, auditing and actuarial work.  We represent UK interests in international standard-setting.  We also monitor and take action to promote the quality of corporate reporting and auditing.  We operate independent enforcement arrangements for accountants and actuaries; and oversee the regulatory activities of the accountancy and actuarial professional bodies.

2.    ESMA’s Guidelines on Alternative Performance Measures define alternative performance measures as: “A financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.”

3.    Read ESMA’s Guidelines on Alternative Performance Measures.

Read or download the FRC’s FAQs on the Guidelines (PDF)

Read or download the FRC’s Annual Review on Corporate Reporting (PDF)

4.    Thematic reviews supplement the FRC’s monitoring of company reports and accounts enabling a focus on topical areas of corporate reporting. 

5.    The Conduct Committee is a body authorised under the Companies Act 2006 (the Act) to review and investigate the annual accounts and strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards.  Following implementation of the Accounting Regulation (EC) No. 1606/2002, this may mean compliance with UK or International Financial Reporting Standards. 

6.    Where breaches of the Act are discovered, the Conduct Committee seeks to take corrective action that is proportionate to the nature and effect of the defects, taking account of market and user needs.  Where a company’s accounts, strategic or directors’ report are defective in a material respect, the Conduct Committee will, wherever possible, try to secure their revision by voluntary means. If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision.  To date, no court applications have been made. 

7.    The Conduct Committee maintains a Financial Reporting Review Panel (FRRP). The Chairman is Geoffrey Green and the Deputy Chairs are Joanna Osborne and John Hitchins. There are currently 21 other members drawn from a broad spectrum of commerce and the professions. Individual cases may be dealt with by a specially constituted Review Group of the FRRP.

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