Alternative Performance Measures (APMs)
Introduction: A standard format for performance reporting has been enforced by many jurisdictions, with no additional analysis on the face of the Statement of Profit or Loss. Others also allowed different ways of conveying the essence of 'underlying' or 'sustainable earnings' to be implemented by organizations.
While the financial statements are compiled in compliance with the relevant financial reporting requirements, more detail is needed by users and issuers are eager to provide users with an interpretation of the financial information.
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This detail ranges from the declaration of additional main group success metrics to the inclusion within the financial statements of more information on individual products. These alternative performance measures (APMs) can assist users in making investment decisions, but they do have limitations.
Common Practice:
APMs, such as normalized profit, earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortization (EBITDA), are common practice for entities.
In different communications, including company media releases and analyst briefings, these alternative profit figures can appear. Specific income and expense items are normally excluded from the profit figure reported in the financial statements by alternative profit calculations.
Also from the point of view of the impact on the performance of this year or when considering the expected impact on future performance, there could be the exclusion of income or expenses that are considered irrelevant.
An example of the latter has been gains or losses from changes in the fair value of financial instruments. Interest and tax exclusion helps to distinguish between the results of the operations of the entity and the impact of financing and taxation.
Benefits of APMs:
These APMs can help to improve the understanding of the results of the company by users and can be important in helping users make investment decisions, as they enable them to gain a better understanding of the financial statements of an entity and evaluate the entity through the management's eyes. They may also be an important tool for making it easier to compare entities in the same sector, market or economic field.
Concerns over APMs:
They may however be misleading due to calculation bias, inconsistency in the year-to-year calculation basis, inaccurate classification of items and as a result, a lack of transparency. There is often little information provided on how to calculate the alternative profit figure or how to reconcile it with the profit reported in the financial statements.
The APMs are also often described in terms which are neither defined by issuers nor included in professional literature and thus cannot be easily recognized by users.
There is also a scope of manipulating the information used to calculate APMs which raises investors doubt on reliability and quality of the APMs.
Alternative Performance Measure: (APM)
An APM is understood as a financial measure, other than a financial measure defined or specified in the applicable financial reporting framework, of historical or future financial performance, financial position or cash flows. APMs include:
- All financial performance measures that are not specifically defined by the applicable financial reporting framework
- Any measure designed to demonstrate the physical performance of an issuer's business activity
- All measures disclosed in order to satisfy other disclosure requirements are included in public documents containing regulated information.
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