European listed companies used widely differing alternative performance measures. Alternative performance measures can provide investors with appropriate additional information. Properly used and presented, these measures can assist investors in gaining a better understanding of a company’s financial performance. The objective of this recommendation is therefore intended as guidance for listed companies to ensure that the information they provide investors is not misleading. The recommendation draws heavily on the experience of CESR members in the supervision and enforcement of financial reporting on financial markets and seeks to address in a forward looking manner, the likelihood that the adoption of International Financial Reporting Standards (IFRS) in Europe is likely to increase the use of Alternative Performance Measures in the future.
Alternative Performance Measures can either be derived from the audited financial statements or stem from other sources and may draw on alternative methodologies to conventional accounting. Examples of Alternative Performance Measures broadly fall into two types of category, the first category could be described as including for example "operating earnings", "cash earnings", "earnings before one-time charges", "EBITDA - earnings before interest, taxes, depreciation, and amortization" and similar terms denoting adjustments to line items of income statement, balance sheet or cash flow statement. The second category, for example, might include additional performance indicators reflecting business activity (e.g. production or activity levels), projection of future cash flows (e.g. the European Embedded Value in insurance sector) or forward-looking indicators. It should be noted however that these are merely illustrative examples as CESR does not determine in this Recommendation a list of ‘accepted alternative performance measures’ for use in the EU.
CESR began a three-month consultation on these recommendations on 11 May 2005. The 29 responses to the consultation (all available on CESR’s website under consultations) were very supportive of CESR initiative to issue a recommendation (of a level 3 nature) in this area and of the recommendations themselves. Response however, highlighted a number of issues which are therefore clarified in the final version of CESR’s recommendation published today.
In particular, in relation to definition of Alternative Performance Measures: the final recommendation has been amended to clarify that Alternative Performance Measures are non-GAAP measures, i.e. financial data that are not included in audited financial statements in view of providing a true and fair view.
Some concerns were expressed in relation to specific principles contained in the recommendation, e.g. on combined presentation of defined measures and Alternative Performance Measures; on prominence of presentation of Alternative Performance Measures vs. defined measures; and on auditor’s involvement. CESR-Fin took account of these concerns for redrafting and clarifying these principles of the recommendation.
The main recommendations put forward by CESR include the following:
- In the preparation of alternative performance measures, companies should respect the IFRSprinciples for financial statements for all types of financial information, i.e. comprehensibility, relevance, reliability and comparability..
- Issuers should define the terminology used and the basis of calculation adopted (i.e. defining the components included in an alternative performance measure). In particular, CESR notes that disclosure is especially important if market practice or academic theory is divided about the components of that measure. Where applicable, the disclosure of the basis of calculation should include indications on hypothesis or assumptions used.
- Where possible issuers should present alternative performance measures only in combination with defined GAAP measures. Furthermore, issuers should explain the differences between both measures; this might be through a reconciliation of figures to provide investors with enough information to fully understand the results and financial position of the company.
- If the company chooses to present alternative performance measures, it should provide comparable information for other periods as well and the same performance measures should be used consistently over time.
- Issuers tend to present alternative performance measures with remarkable prominence, sometimes even more prominently than the defined measures directly stemming from financial statements. To ensure that investors are not mislead, CESR recommends that issuers highlight the defined performance measures with greater prominence than alternative performance measures derived from audited financial statements and which resemble defined performance but do actually not have the characteristics of the defined measures (to be audited, based on an identified reporting framework, consistent and comparable with performance measures of other enterprises). In other cases of Alternative Performance Measures, defined measures and alternative measures will be presented according to their usefulness y to portray the entity’s performance, considering that alternative measure should not be presented with greater prominence
- Issuers may internally use alternative performance measures for measuring and controlling the company’s output. CESR recommends that issuers give an explanation of the internal use of alternative performance measures in order to make investors understand the relevance of this information.
- The issuer should disclose whether the alternative performance measures have been subject to separate auditor’s review and, if so, indicate the nature of such a review and its conclusion. CESR believes that the management of the reporting entity should always inform its auditors about its use of alternative performance measures, and thereby enable the auditor to consider the requirements of applicable audit standards.
