ALTERNATIVE PERFORMANCE MEASURES (APMs)

23 Pages·2017·0.41 MB·English

Financial Reporting Council
CORPORATE
REPORTING
THEMATIC
REVIEW
ALTERNATIVE
PERFORMANCE
MEASURES (APMs)
NOVEMBER 2017
The Financial Reporting Council (FRC) is responsible for
promoting transparency and integrity in business. The FRC
sets the UK Corporate Governance and Stewardship Codes
and UK standards for accounting and actuarial work; monitors
and takes action to promote the quality of corporate reporting;
and operates independent enforcement arrangements for
accountants and actuaries. As the Competent Authority for
audit in the UK the FRC sets auditing and ethical standards
and monitors and enforces audit quality.
The FRC does not accept any liability to any © The Financial Reporting Council Limited 2017
party for any loss, damage or costs howsoever
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arising, whether directly or indirectly, whether
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CONTENTS

1 Background 5
2 Key messages 6
3 The requirements of the ESMA Guidelines 8
4 Principal findings – General 10
4.1 Definitions and labels 10
4.2 Non-recurring and similar terms 11
4.3 Explanations for the use of APMs 12
4.4 Reconciliations 14
4.5 Prominence 16
4.6 Other observations 17
4.7 Improvements in year 17
5 Principal findings – Adjusted measures of profit 18
5.1 Measures used 18
5.2 Explanations 20
5.3 Restructuring costs 21
6 Next steps 22
Financial Reporting Council 3
Alternative Performance Measures (APMs)
Thematic reviews supplement the FRC’s monitoring
work conducted by Corporate Reporting Review (CRR).
CRR monitors company reports and accounts for
compliance with the Companies Act 2006, including
applicable accounting standards, and other reporting
requirements. The aim of our reviews is to identify and
share examples of good practice reporting and highlight
areas where improvements can be made.
This report shares our detailed findings
from the targeted review of certain
aspects of companies’ APM disclosures.
Companies can use this review to assess
and enhance their own disclosures to
ensure that they provide high quality
information to investors in their annual
reports and accounts.
CRR’s reviews are based solely on
company reports and accounts and do not
benefit from detailed knowledge of each
company’s business or an understanding
of the underlying transactions entered into.
They are, however, conducted by staff
who have an understanding of the relevant
legal and accounting framework. The FRC
provides no assurance that the reports and
accounts subject to review, including the
examples of good practice reporting, are
correct in all material respects. The FRC’s
role is not to verify the information provided
in a company’s report and accounts but
to consider the quality of compliance with
reporting requirements.

4 Corporate Reporting Thematic Review
1 BACKGROUND
In December 2016, the FRC wrote to 20 companies
informing them that CRR would review the APM disclosures
in their next annual report and accounts. The purpose of the
review was to encourage better disclosures of APMs and, in
particular, to consider those matters which had given cause
for concern in CRR’s earlier review of a sample of 2016
interim reports1. A press notice was issued on 15 December
2016 to raise awareness of the issues to be covered by this
thematic review.
We decided to carry out a second review
to examine how APMs were used in the Note:
very different context of annual reports and ESMA has subsequently issued a series
when all companies would have had a full of questions and answers on various aspects
opportunity to consider both the European of the Guidelines (“the Q&A”), the latest
Securities and Markets Authority’s (ESMA) being published in October 2017. As most
of the Q&A had not been published at
“Guidelines on Alternative Performance
31 December 2016, we have not taken them
Measures” (the Guidelines) themselves
into account in this review in determining
and the comments made in our first
whether or not individual reports and accounts
thematic report. complied with the Guidelines.
Our sample comprised eight companies In due course, we will consider whether
from the FTSE 100, nine from the FTSE any change to our approach is necessary
in the light of the Q&A and will issue further
250, two smaller listed entities and one
guidance if we believe that further modification
company from the AIM market.
is required. To be clear, no such modified
guidance will affect our approach to reviews of
This review aimed to establish the extent to
December 2017 year end reports.
which the reports and accounts considered
were consistent with the Guidelines. In
carrying out the review, we took into
consideration the findings of our 2016
review. We also identified, by comparing
the reports with the equivalent document
for the previous year, what steps, if any,
companies had taken to achieve greater
consistency with the Guidelines. In line
with our objective of achieving continuous
improvement in reporting, we have sought
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Financial Reporting Council 5
Alternative Performance Measures (APMs)
2 KEY MESSAGES
• Most of the reports in the sample gave,
General
taken as a whole, equal prominence
to APMs and IFRS measures. Equal
APMs were used by all
prominence was, however, more
companies in the sample. of an issue in sections such as
the chairman’s statement or chief
Compliance with the Guidelines was executive’s review than it was with the
generally good across the sample and presentation of highlights or in financial
very much improved on the previous year’s reviews or equivalents.
annual reports (to which the Guidelines did
not apply). In particular: Our main concern arising from the review
is the use of the term “non-recurring” and
• Definitions were given in all cases. the use of similar terms such as “unusual”,
Labels used generally conveyed an “infrequent” and “one-off” in connection
accurate description of each APM, with items such as restructuring costs and
although we are aware, from our impairment charges. For larger companies
regular reviews, of instances where in particular, there will be few occasions
it was not always clear whether a when there is only one event in a period
measure used was an APM rather of years which drives such charges. We
than an International Financial accept that there will be some such cases
Reporting Standards (IFRS) measure. where more than one year is affected, for
example, a very substantial restructuring
• Explanations for the use of APMs that is part of a single plan with a defined
were given in all cases, although two cost. However, we recommend that,
companies only asserted that the in general, companies remove such
APMs were the “most meaningful” descriptions as “non-recurring” from
measures without further explanation their definitions of APMs and select more
as to why. We saw a number of good accurate labels. A number of examples are
examples and also noted helpful given in sections 4 and 5.
“health warnings” being inserted by
several companies. We also found far In considering the quality of explanations
fewer explanations using either cursory for the use of APMs, we noted that 85%
or boilerplate wordings than in our of the companies in the sample stated
previous review. that APMs were used by management
in evaluating performance but only
• Reconciliations were given by all 40% referred to their use in determining
companies but not necessarily for management and executive remuneration.
all APMs used; the most frequently However, our review did not involve
omitted being for ratios such as return reviewing remuneration committee reports
on capital and cash conversion. to assess the extent that disclosed APMs
Reconciliation disclosures can be were used in determining management
lengthy where a company uses several remuneration.
APMs and we saw a number of good
approaches to presenting these in a
clear and concise way.
6 Corporate Reporting Thematic Review
All but one of the companies in the
sample had made at least minor changes
to the presentation of APMs in the year,
with some changes being extensive. The
most common improvements were to
explanations for the use of APMs followed
by a better balance between APMs and
IFRS measures and presenting clearer
reconciliations.
Adjusted measures of profit
The great majority of the companies in
the sample used either “adjusted” or
“underlying” as the principal description for
their adjusted measure of profit (85% of the
sample). The adjusted measure appeared
as a line item in the income statement for
65% of the sample.
As with the earlier review, there was
significant commonality in items excluded
from the corresponding IFRS measure
in arriving at the adjusted measure.
Amortisation of acquired intangibles, at
least some restructuring charges and
profit or loss on disposal of investments or
business were near universal adjustments.
However, we noted that share-based
payments were only added back in
three cases.
We saw relatively few explanations as to
why individual items were added back with
the exception of amortisation of acquired
intangibles and restructuring costs.
For restructuring costs, companies often
linked the costs in the year to identified
programmes or initiatives that were
discussed elsewhere in the report
and accounts.
In all but three cases, the adjusted
measure of profit was higher than the
IFRS equivalent.

Financial Reporting Council 7
Alternative Performance Measures (APMs)
3 THE REQUIREMENTS
OF THE ESMA
GUIDELINES
This thematic review, together with the earlier review in 2016,
has been conducted in the light of concerns expressed
about the use of APMs by a number of stakeholders and
commentators. The topic was given added relevance by the
issue of the Guidelines. Listed companies are required to
make every effort to comply with the Guidelines, which apply
to all regulated information, including interim statements
and annual reports, published on or after 3 July 2016.
The Guidelines therefore applied for the first time to the
annual reports and accounts of the companies included
in the sample.
The Guidelines define an APM as “a The Guidelines do not apply to APMs
financial measure of historical or future disclosed in financial statements prepared
financial performance, financial position, or in accordance with IFRS. Therefore, in
cash flows, other than a financial measure terms of annual reports and accounts, their
defined or specified in the applicable main impact is on the narrative reporting in
financial reporting framework”. The such documents, mainly strategic reports
definition therefore covers, for example, but also highlights pages and chairman or
adjusted measures of profit, such as chief executive statements. This is the case
underlying or adjusted profit. While many whether or not these have been formally
users acknowledge that such measures included in the strategic report required
can provide useful financial information by the Companies Act 2006 (the
in addition to those provided under IFRS, Companies Act).
concerns have been expressed that they
can also obscure important information We believe that the Guidelines largely
shown in the IFRS accounts or present an represent a codification of what is required
unjustifiably favourable view of trends or of APMs to support a fair, balanced and
other aspects of performance. comprehensive strategic report and of best
practice reporting in this area. Accordingly,
we expected many companies to review,
assess and alter their disclosures in
response to the coming into force of the
8 Corporate Reporting Thematic Review
Guidelines. In our regular reviews of reports
and accounts, we consider whether APMs
disclosed in strategic reports are consistent
with the Guidelines. Where there are
material inconsistencies, we write to the
companies concerned and ask for further
explanation. We take account of such
inconsistencies when deciding whether
strategic reports meet the requirements of
the Companies Act.
We have challenged companies where
narratives focus only on “good news” or if
trend information is not sufficient to explain
the effect of non-recurring items. We have
also considered the balance between
the discussion of IFRS and non-IFRS
measures, particularly where this affected
trend information.
This practice is not a major change in our
approach and should not lead to reports
becoming less understandable, clear
or concise.
Financial Reporting Council 9
Alternative Performance Measures (APMs)
4 PRINCIPAL
FINDINGS – GENERAL
“non-operating” used where some of the
4.1 Definitions and labels items appearing under that label appear to
be part of normal operating activities.
The FRC expects companies to provide
definitions of all APMs used and to use In terms of positioning, definitions were
labels which accurately describe the located either in the strategic report,
APM to which they are applied. usually as part of the financial review or
similar section (60%), in the notes to the
All the companies in the sample provided accounts (10%) or at the end of the report
definitions of the APMs used, although, and accounts, that is outside the audited
in three cases, not all APMs used were financials (30%), sometimes in a glossary.
defined. The missing APMs were cash
conversion, return on invested capital and One particularly helpful format we observed
organic revenue growth. in a number of reports tied together the
definition of the APM with its purpose and,
The definitions were usually generally easy on occasion, a comment on performance in
to find, with two exceptions. In one case, the year. For example:
no cross-references were given. In the
other case, the reader was required to go
• “Underlying Trading Profit (UTP)
first to the glossary at the end of the report
and accounts which then referred back to
the notes to the accounts for details. In our Definition
view, definitions should be clearly cross-
Trading Profit is defined as IFRS
referenced and complete in themselves.
Operating Profit adjusted for (i)
amortisation and impairment of
The labels given to APMs generally
intangibles arising on acquisition
reflected their content and basis of
and (ii) exceptional items. Consistent
calculation. However, one company
with IFRS, it includes Serco’s share
referred to its alternative measure of
of profit after interest and tax of its
profit as “reported”, which is potentially
joint ventures. Underlying Trading
misleading. A reader would have been likely
Profit excludes Contract and Balance
to assume that “reported” referred to the
Sheet Review adjustments (principally
IFRS results.
Onerous Contract Provision (OCP)
releases or charges), the beneficial
From our regular reviews, we are aware of
treatment of depreciation and
instances where APMs have been given
amortisation of assets held for sale,
labels such as “operating profit” and it
and other material one-time items as
has not been made clear that the item
set out in the Finance Review. Trading
concerned is an adjusted rather than an
Profit measures include discontinued
IFRS measure, or has only been made
operations for consistency with
clear once at the beginning of the strategic
previous guidance.
report. We have also seen labels such as
10 Corporate Reporting Thematic Review