FRC: Thematic Review – Alternative Performance Measures (APMs)
On October 6, 2021 the Financial Reporting Council (FRC) published a thematic review assessing the quality of Alternative Performance Measure (APM) reporting in the UK, five years after the implementation of the European Securities and Markets Authority Guidelines on APMs (ESMA Guidelines) and the introduction of the IOSCO statement on Non-GAAP Financial Measures (IOSCO statement). The review also follows on from the FRC’s most recent APM thematic review report, published in November 2017.
The FRC’s review found that, while companies generally provided good quality APM disclosures, their context needs to be better explained, particularly as profit-based APMs tended to be more favourable than their GAAP results. Companies should clearly define their APMs and explain why they are needed, but not give them greater focus than their IFRS or UK GAAP equivalents. The FRC note that relevant GAAP information can be obscured by high usage of alternative measures and companies are encouraged to consider the number of APMs that they present.
The FRC also note in the report that, following the UK’s exit from the EU, the FRC expect main market companies that use APMs to continue to apply the ESMA Guidelines since the FRC consider them to be consistent with the Companies Act 2006, which requires a strategic report to contain a fair, balanced and comprehensive analysis of a company’s business during the financial year and its position at the end of that year. Similarly, the FRC believe that AIM-quoted entities and other entities that use APMs should apply the ESMA Guidelines as they provide helpful guidance and reflect best practice.
Alongside the examples of better disclosure and opportunities for improvement identified throughout the report, the FRC expect companies to carefully consider whether the matters identified apply to them and amend their disclosures where necessary. In particular, the FRC expect companies to:
- Ensure that APMs are not presented in ways that give them greater prominence than amounts stemming from the financial statements.
- Avoid comments that imply APMs have more authority than amounts stemming from the financial statements.
- Provide specific, tailored explanations for the inclusion of individual APMs in their reports, as well as the basis for classifying amounts as adjusting items.
- Explain terms such as ‘underlying profit' or 'core operations' and the basis for identifying adjustments as 'non-underlying' or non-core’.
- Ensure that APMs are reconciled to the most directly reconcilable line items, subtotals or totals presented in the financial statements, and not to other APMs.
- Disclose relevant information for any significant multi-year restructuring programmes that are classified as adjusting items.
- Disclose the cash flow impact of material adjusting items and exceptional items.
- Explain tax matters relating to APMs by:
- Including tax matters in their accounting policies for APMs (including accounting policies for classifying material or unusual tax amounts as adjusting items).
- Providing granular information on the effective tax rate on adjusting items, where necessary.
(FRC, Thematic Review - Alternative Performance Measures (APMs), 06.10.2021)