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FRC’s Response to IFRS Interpretations Committee’s Tentative Agenda Decision 'Management-defined Performance Measures - Hypothetical Income and Expenses (IFRS 18)'
Bruce Mackenzie IFRS Interpretations Committee Chair IFRS Foundation Columbus Building 7 Westferry Circus Canary Wharf London E14 4HD
1 September 2026
Dear Bruce,
Tentative Agenda Decision Management-defined Performance Measures—Hypothetical Income and Expenses (IFRS 18)
I am writing on behalf of the UK's Financial Reporting Council (FRC) in response to the above Tentative Agenda Decision1.
The purpose of the FRC is to serve the public interest and support UK economic growth by upholding high standards of corporate governance, corporate reporting, audit and actuarial work.
The FRC does not set requirements for non-financial reporting in the UK but does issue guidance on how to apply legal requirements, such as our Guidance on the Strategic Report2.
The FRC has a statutory responsibility to monitor and improve the quality of corporate reporting in the UK.3 This includes both financial reporting and non-financial reporting. Our activities include publishing thematic reviews of certain aspects of companies' corporate reports, focusing on areas of corporate reporting in which we believe there is scope for improvement and particular shareholder interest. The thematics' findings are based on a sample of limited-scope reviews of company accounts, together with the results of our broader-scope routine monitoring activities. In particular, we published thematic reviews on 'alternative performance measures' (APMs) in 20164, 20175 and 20216.
Whilst the FRC does not object to all use of 'hypothetical' information in APMs, we have previously indicated that we expect entities not to present measures which attempt to depict what the entity's financial performance would have been in the absence of a significant event (such as the Covid-19 crisis) which had, in fact, occurred. We think there is a risk that, although this is not the subject matter of the Agenda Decision, preparers might see it as opening the door to increased use of APMs containing hypothetical information, which could in turn include measures that the FRC considers problematic.
We think it would be beneficial for the Agenda Decision to draw attention to the fact that 'upstream' decisions about what measures are appropriate to present outside the financial statements should take into account the legal and regulatory framework in the preparer's jurisdiction. We agree that, once a measure has been presented, the 'downstream' decisions about whether that measure meets the definition of an MPM (and hence is subject to IFRS 18's disclosure requirements) can be addressed by IFRS 18 and by the Committee. However, without drawing attention to these 'upstream' decisions we see a significant risk of unintended consequences, if the [Tentative] Agenda Decision is read as appearing to legitimise the presentation of a measure that may not meet legal and regulatory requirements.
Our detailed comments are included in the Appendix. If you have any queries or would like to discuss our comments in more detail, please do not hesitate to contact Stephen Maloney (Senior Project Director) at [email protected].
Yours sincerely,
Mark Babington Executive Director, Regulatory Standards Direct telephone line: 020 7492 2323 Email: [email protected]
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Appendix: Detailed comments on the Tentative Agenda Decision Management defined Performance Measures—Hypothetical Income and Expenses (IFRS 18)
A1. The Tentative Agenda Decision is concerned with management-defined performance measures (MPMs) as defined in IFRS 18 Presentation and Disclosure in Financial Statements. By definition, MPMs are measures presented outside the financial statements.
A2. Our primary interest in the [Tentative] Agenda Decision is in whether it could lead to unintended consequences, including potential non-compliance with legal and/or regulatory requirements, in relation to the information presented in the 'front half' of an annual [(or interim)] report. We recognise that, given the definition of MPMs, this risk could also extend to other public communications outside the annual report.
UK context
Legal and regulatory requirements
A3. A key legal requirement in the UK is to present a strategic report in the 'front half' of the annual report. Company law requires the strategic report to contain 'a fair review of the company's business’7 which must be 'balanced and comprehensive'8.
A4. The FRC provides Guidance on the Strategic Report to assist preparers in applying the legal requirements, noting that:
"The strategic report must provide a fair review of the company's business, which is a balanced and comprehensive analysis of the development and performance of the business in the financial year and of its position at the end of that year consistent with the size and complexity of the business" 9.
A5. Such legislative requirements are reiterated in regulation for listed entities. For example, the Financial Conduct Authority's (FCA) Disclosure Guidance and Transparency Rules (DTR) require a listed entity to produce an annual management report containing 'a fair review of the issuer's business'10, which must be 'balanced and comprehensive'11. Similar requirements apply for interim reporting.12
A6. The requirement for information to be fair, balanced and comprehensive therefore shapes our regulatory expectations for all information presented in the 'front half', including MPMs.
Alternative Performance Measures (APMs)
A7. The European Securities and Markets Authority (ESMA) has produced Guidelines on Alternative Performance Measures13 (APMs), which set out principles for disclosure for APMs. The ESMA Guidelines define an APM as a measure of historical or future performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.
A8. UK law requires that the review of the business in the strategic report must, to the extent necessary for an understanding of the development, performance or position of the company, include analysis using financial key performance indicators (KPIs), and where appropriate, analysis using other KPIs.14 Our Guidance on the Strategic Report points out that financial KPIs can be APMs.15
A9. Accordingly, UK companies often use APMs in their interim and annual reports to supplement information provided under IFRS Accounting Standards.16 Following the UK's exit from the EU, the FRC has indicated that the ESMA Guidelines continue to reflect good practice for APM disclosures in all strategic reports as they are consistent with the purpose of the strategic report.17 They are also specifically applicable under certain rules of the FCA.18
A10. The FRC has reiterated its expectations over the years, in our:
- Corporate Reporting Thematic Review – Alternative Performance Measures (2016)19;
- Corporate Reporting Thematic Review – Alternative Performance Measures (2017)20;
- Thematic Review: Alternative Performance Measures (2021)21;
- Annual Review of Corporate Reporting 2023/2422; and
- Guidance on the Strategic Report23.
A11. Our Supervision teams find that preparers generally follow the ESMA Guidelines.
The use of hypothetical APMs
A12. The FRC has previously communicated that the use of 'hypothetical' information in APMs may be problematic, particularly in the context of major crises such as a pandemic or war. Whilst the FRC does not object to all use of hypothetical information, particular concerns arise if, for example, an entity presents a measure which seeks to present what its financial performance would have been if a particular crisis had not happened. We expect preparers to follow our guidance on this topic, when considering which APMs it is appropriate to present (particularly within the annual report and accounts).
A13. For example, in 2020 the FRC issued COVID-19 Pandemic Guidance for companies on Corporate Governance and Reporting24. This provided guidance about our expectations of companies' use of APMs in the context of a significant crisis. In particular, we stated that:
APMs which attempt to provide a measure of 'normalised' or 'pro-forma' results, excluding the estimated effect of the Covid-19 crisis, are likely to be highly subjective and, therefore, potentially unreliable. In addition to the subjectivity arising around which costs to exclude, in most cases Covid-19 is likely to have resulted in reductions in revenues. Any adjustment for lost revenues would be hypothetical and could not be reflected reliably in an APM. We do not expect companies to provide these measures; for example, by including them in a 'third-column' income statement presentation.
A14. Our 2021 Thematic Review reiterated our expectation that “companies should not present 'normalised' or 'pro-forma' results, designed to exclude the estimated effect of Covid-19 or to include lost revenues".
The relationship between APMs and MPMs
A15. As defined in IFRS 18, MPMs are used in public communications outside financial statements. Given their respective definitions, many MPMs are likely to be APMs, although not all APMs will be MPMs.
Requirements of IFRS 18
A16. IFRS 18 requires a preparer to determine whether a measure that it communicates outside its financial statements meets the definition of an MPM and, if so, prescribes certain disclosures which must be presented in the notes to the financial statements about that MPM. This provides a degree of transparency and accountability over MPMs.
A17. However, IFRS 18 makes no comment on which measures the entity may communicate outside its financial statements, nor on the usefulness of such measures.
A18. We do not believe that IFRS 18 is intended to confer credibility on, or withhold credibility from, a measure according to whether or not it meets the definition of an MPM (and hence is subject to the additional disclosure requirements). However, we think there is a risk of it being understood by some stakeholders as doing so.
A19. Therefore, in clarifying that a measure that includes hypothetical income and expenses can be an MPM, we think the [Tentative] Agenda Decision risks being seen as conferring credibility on such measures, unless it also includes a reminder that the legal and/or regulatory framework needs to be considered in deciding which measures to present.
The Committee's deliberations
A20. The IFRS Interpretations Committee considered the question of, in effect, whether a measure would be excluded from the definition of an MPM (and therefore exempted from the corresponding disclosure requirements) by virtue of including hypothetical income and expenses (being income and expenses that an entity has not recognised and will never recognise in its statement of financial performance applying IFRS Accounting Standards).
A21. During the Committee's discussion, the question was posed of whether the [Tentative] Agenda Decision should signpost the need to respect regulatory requirements over which measures should or should not be presented (before applying the requirements of IFRS 18 to determine which measures meet the definition of an MPM and therefore require disclosure in the notes to the financial statements). It was concluded that this additional 'upstream' layer would not be added to the Tentative Agenda Decision.
A22. The published Tentative Agenda Decision does refer to the fact that to be an MPM, a measure must be used in public communications:
The Committee observed that to be considered a management-defined performance measure, a subtotal of income and expenses must, amongst other things, be used by an entity in public communications outside financial statements.
A23. However, this does not draw attention to considerations (such as those arising from the legal and regulatory framework in a jurisdiction) relevant to whether it is appropriate to use a measure in public communications.
The FRC's perspective
A24. We think there is scope for confusion between:
- the considerations about whether it is appropriate to present any given measure outside the financial statements; and
- the decision as to whether a measure which is, in fact, presented meets the definition of an MPM (and hence is subject to the disclosure requirements in IFRS 18) or not.
The risk of unsuitable MPMs
A25. Paragraph 123 of IFRS 18 requires that 'an entity shall label and describe each MPM in a clear and understandable way that does not mislead users of financial statements'. Paragraph B134(a) further explains that 'an entity shall label and describe the measure in a way that faithfully represents its characteristics'. These requirements necessarily apply to the disclosures made about MPMs in the notes to the financial statements.
A26. Paragraph BC358 of the Basis for Conclusions to IFRS 18 states that MPMs themselves 'are required to comply with the general requirements for information included in the financial statements'. Although we agree that this is important, we disagree that the IASB can require it of information presented outside the financial statements.
A27. Therefore there remains a risk that the MPMs themselves will not be presented 'in a clear and understandable way that does not mislead users of financial statements'.
A28. This risk already exists, and is addressed through legal and regulatory requirements applicable to information presented outside the financial statements (as discussed above).
A29. However, the [Tentative] Agenda Decision could exacerbate this risk if it appears to provide legitimacy for the presentation of additional MPMs, including those involving hypothetical items. Presenting the disclosures required by IFRS 18 about MPMs does not resolve the problem of the MPM itself being inappropriate; disclosures which faithfully represent management's views would not resolve the problem of management's views themselves not providing fair and balanced information.
Conclusion
A30. We believe there is some risk of the [Tentative] Agenda Decision being read as overriding, or at least distracting attention from, the legal and/or regulatory framework in a jurisdiction and as providing legitimacy for the presentation of measures which would not align with such requirements.
A31. We think this could result in the presentation of additional measures outside the financial statements which might not be consistent with legal and/or regulatory requirements or expectations and that might introduce additional unintended consequences.
A32. Although the [Tentative] Agenda Decision does not change the requirements of IFRS 18, it draws attention to the idea of presenting 'hypothetical' measures (whether or not they meet the definition of MPMs), which could be problematic without a suitable reminder to consider the legal and/or regulatory framework.
A33. We recommend that the [Tentative] Agenda Decision should note that, in deciding which measures to use in public communications outside financial statements, an entity may need to take into account the legal and/or regulatory framework applicable in its jurisdiction.
A34. In future revisions to IFRS Practice Statement 1 Management Commentary, the IASB could consider enhancing its existing guidance by highlighting that, in any given jurisdiction, there may be legal and/or regulatory considerations influencing which measures are and are not appropriate to present in management commentary.
Footnotes
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IFRS - Tentative Agenda Decision and comment letters: Management-defined Performance Measures—Hypothetical Income and Expenses (IFRS 18) ↩
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Guidance on the Strategic Report (February 2026) ↩
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Such activity is sometimes described as part of a regulator's 'enforcement' activities, although within the FRC's structure this function is part of our Supervision rather than Enforcement division. ↩
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CRR Thematic Review - APMs Nov 2016.pdf ↩
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Alternative Performance Measures APMs 2017.pdf ↩
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FRC Thematic Review on APMs - October 2021 ↩
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Companies Act 2006 s414C(2)(a) ↩
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Companies Act 2006 s414C(3) ↩
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Guidance on the Strategic Report (February 2026) ↩
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DTR 4.1.8 R ↩
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DTR 4.1.9(1) R ↩
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DTR 4.2 Half-yearly financial reports ↩
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ESMA Guidelines on Alternative Performance Measures (October 2015) ↩
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Guidance on the Strategic Report (February 2026) paragraph 8.13 ↩
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Guidance on the Strategic Report (February 2026) paragraph 8.25 ↩
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COVID-19 Pandemic – Guidance for companies on Corporate Governance and Reporting (December 2020) ↩
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Guidance on the Strategic Report (February 2026) paragraph 8.26; see also Summary of key developments for 2020/21 annual reports (November 2020) ↩
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Guidance on the Strategic Report (February 2026) paragraph 8.25 and footnote 48 ↩
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CRR Thematic Review - APMs Nov 2016.pdf ↩
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Alternative _Performance_Measures_APMs_2017.pdf ↩
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FRC Thematic Review on APMs - October 2021 ↩
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Annual Review of Corporate Reporting 2023 24 ↩
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Guidance on the Strategic Report (February 2026) ↩
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COVID-19 Pandemic – Guidance for companies on Corporate Governance and Reporting (December 2020) ↩