The review of 20 sets of 30 June 2016 interim statements was undertaken by the FRC’s corporate reporting review (CRR) team, in response to concerns expressed by a number of stakeholders, and the coming into force in July of the Guidelines on Alternative Performance Measures, issued by the European Securities and Markets Authority (ESMA).

The FRC says the review found that definitions and reconciliations were generally provided for APMs, and their descriptions were not misleading.

However, explanations given as to how companies had determined that it was beneficial to disclose APMs varied significantly. All FTSE 100 and FTSE 250 companies provided at least some explanation, but this was not the case among the smaller companies.

While very full explanations were provided by some companies, some other companies gave quite cursory, boilerplate explanations or assertions, for example, stating only that ‘these figures better reflect performance of continuing businesses’; ‘this reflects the way the business is managed and how the directors assess the performance of the group’; or ‘adjustments to results have been presented to give a better guide to business performance’.

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 seven of the 20 statements compared to the companies’ previous interims, largely related to better explanations.

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 regulator says it will take account of the findings 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, said: ‘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.’

Corporate reporting thematic review alternative performance measures is here.