Common terms used to identify non-GAAP financial measures include ‘underlying earnings’, ‘normalised profit’, ‘pro forma earnings’, ‘cash earnings’, ‘earnings before interest, tax, depreciation and amortisation (EBITDA)’, ‘adjusted earnings’, and ‘earnings before non-recurring items’.
The IOSCO guidance on such non-GAAP measures is contained in a proposed Statement on Non-GAAP Financial Measures. The proposed Statement recognises that issuers often convey information using non-GAAP financial measures, and accepts these measures can be useful in providing additional insight into an issuer's financial performance, financial condition and cash flows. However, the proposed Statement goes on note potential problems that can arise with such measures where they are presented inconsistently, defined in adequately, or obscure GAAP financial results. The document also notes further difficulties arising from a lack of standardised meaning of non-GAAP measures, meaning they are not comparable between issuers.
In responding to the potential problems that can arise in the context of non-GAAP financial measures, the proposed Statement sets out IOSCO's expectations for the presentation of such measures by issuers, including that sufficient information should accompanying non-GAAP financial measures to aid in their understanding, and that the measures should be presented transparently and with disclosure of how they are calculated.
The proposed Statement then provides specific expectations in the following broad categories:
- Defining the non-GAAP financial measure. This encompasses providing a clear explanation of the basis of calculation, clearly labelling measures such that they are distinguished from GAAP measures, explaining why the measures are useful, and explicitly stating the non-GAAP measure does not have a standardised meaning and may not be comparable between entities
- Unbiased. This requires that non-GAAP financial measures should not be used to avoid presenting adverse information to the market
- Prominence of GAAP and non-GAAP measures. Non-GAAP measures and their most directly comparable GAAP measures should be presented with equal prominence, or the GAAP measure given greater prominence
- Reconciliation. Reconciliations should be provided between non-GAAP financial measures and their most directly comparable GAAP measure presented in the financial statements, with adjustments explained and reconcilable to the financial statements, or information about how they are calculated provided
- Present non-GAAP financial measures consistently over time. Measures should generally remain consistent from period to period, include comparative information, with any changes in composition also reflected in comparative information
- Recurring items. Items which are reasonably likely to affect past and future periods, such as restructuring costs and impairment losses, should not be described as non-recurring, infrequent or unusual.
The proposed Statement is intended to be used by entities applying International Financial Reporting Standards (IFRSs) and other accounting principles. Furthermore, the proposed Statement is not intended to affect the ability of individual jurisdictions to develop their own requirements for the presentation of non-GAAP financial measures. Jurisdictions where guidance already exists or is proposed include Australia, New Zealand and the European Union.
The proposed Statement is open for comment until 5 December 2014. Click for (links to IOSCO website):