An alternative performance measure is 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.
They haven't had much attention yet, but alternative performance measures (APMs) are slowly entering the limelight. Why is that? In a word: regulators. Since APMs let you (to an extent) be your own boss when it comes to customising the terminology and itemisation that fits your firm, they have been widely used. However, ESMA's recent guidelines have taken a stance on APMs and the quality thereof, forcing most companies to do an overhaul on what they disclose.
A recurring debate
2018 has indeed brought a renewed focus on APMs by various regulators, sparking debate and disagreement over how clear they need to be.
The whole purpose of adopting IFRS was to have a unified standard that increases comparability between various companies, allowing investors to (more) easily understand and contrast companies' performances. APMs, one side of the argument goes, undermine this goal.
That being said, managers and investors are not always satisfied with how close IFRS statements can get to calculating that one magic number reflecting "true profit" or "true earnings". They therefore want to seek better measures. The debate is thus centred on which adjustments should be allowed to IFRS figures, and how seriously these adjusted figures can be taken.
All or nothing
ESMA has mentioned three principles that companies should consider when including APMs within their financial statements: purpose, use, and relevance. Each APM should be critically evaluated in terms of these three criteria to ensure that it will pass the regulator's test.
As the focus on this topic grows, companies need to take care when reviewing their disclosures to ensure that a balanced picture is presented when weighing up the traditional IFRS disclosures vs APMs. A few points to highlight that are clearly not up for debate include:
- Each APM should be defined in a clear and understandable way.
- APMs should be given meaningful labels reflecting their content and basis of calculation.
- APMs should avoid conveying misleading messages to users (e.g. through use of overly optimistic or positive labels such as "guaranteed profit").
- APMs should be reconcilable to a line item, total, or subtotal within the financial statements.
- APMs should not be given more prominence or emphasis than measures directly stemming from the financial statements.
Compliance is the cornerstone
If you want to ensure that you are in line with the market and regulatory expectations regarding APMs, ESMA has issued a guide on this topic. More recently it has also issued its updated Q&A guide on the same topic. These guidelines aim to promote the usefulness and transparency of APMs included in the prospectus or regulated information and can certainly help you navigate the road to compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.