The proposed guide, Developing and Reporting Supplementary Financial Measures — Definition, Principles, and Disclosures, is the latest in a series of International Good Practice Guidance (IGPG) publications developed by the PAIB. The PAIB Committee develops the IGPG as part of its objective of serving IFAC member bodies and professional accountants worldwide who work in commerce, industry, financial services, education, and the public and not-for-profit sectors.
The draft guide notes that supplementary financial measures are often designed to assist management, investors and other stakeholders in understanding performance. Such measures are used in internal and external reporting, are also used outside of financial reporting, such as in the measurement of debt covenants contained in debt agreements.
'Supplementary financial measures' are defined in the draft guide as "those financial measures not specifically identified by a GAAP framework" - also referred to other contexts as 'non-GAAP information' or 'alternate performance measures'. Such measures characteristically do not have accepted definitions and use selected information, including adding or omitting amounts from GAAP measures. Adjustments to GAAP measures might be made on the basis of management assumptions, judgements and estimates, with or without reference to GAAP.
The guide proposes to use the concepts in the Conceptual Framework developed by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB), particularly the qualitative characteristics of useful financial information, as the basis of principles that should be used to determine whether a supplementary financial measure has sufficient attributes to be reported. These principles are that supplementary financial measures should be:
- Relevant. For a supplementary financial measure to be reported, it should either be used by management in assessing performance or should be employed by knowledgeable users of the external report.
- Complete. A supplementary financial measure should provide all the information necessary for a user to understand the phenomenon being depicted. Completeness is achieved when the measure is not in need of adjustment or additional complementary information.
- Neutral. A supplementary financial measure should not be slanted, weighted, or manipulated to obtain a desired result. This requires the addressing of all relevant positive and negative items.
- Transparent. The description of a supplementary financial measure should align with its components. Additionally, a supplementary financial measure should be accompanied by sufficient explanation to render it as free as is practicable from uncertainty and estimation error.
- Understandable and verifiable. Knowledgeable users need to understand a supplementary financial measure’s construction and limitations and see that it is verifiable by being able to reach consensus that a measure faithfully represents what it purports to depict.
- Comparable. Users need to be able to compare supplementary financial measures between entities in the same industry and between periods.
- Timely. A supplementary financial measure needs to be reported at the same time as the related financial statements.
The guide proposes that measures meeting these characteristics should be capable of being reported as a supplementary financial measure. Where such measures are reported externally, additional guidance is proposed about the disclosures that should be made:
- Definition and purpose of the measure - including labelling supplementary financial measures and distinguishing them from GAAP measures
- Change in composition of a supplementary financial measure - reasons for the change and restatement of comparative information
- Quantitative reconciliation to GAAP measure - supplementary financial measures should be reconciled to any directly comparable reported GAAP measure, showing each adjustment made, or a basis of computation provided
- Accompanying contextual disclosure - information about additional or eliminated items in a measure, and other information to understand a measure's limitations
- Location - supplementary financial information reported externally should complement but not overshadow GAAP measures, and may be best presented outside of financial statements.
The disclosure of non-GAAP information is a contentious topic and has seen regulatory guidance issued or proposed in many jurisdictions, including Australia, New Zealand and the European Union. The proposals in the guide share many recommendations with these regulatory developments.
Comments on the draft guide close on 26 May 2014. Click for more information (link to IFAC website).