The thematic review was conducted following concerns expressed by a number of stakeholders, as well as the FRC in its recently published Annual Review of Corporate Reporting, and the coming into force on 3 July of the Guidelines on Alternative Performance Measures (“the Guidelines”), issued by the European Securities and Markets Authority (ESMA). 

The interim financial statements (30 June 2016) of 20 listed companies spread across the FTSE 100, FTSE 250 and smaller companies were reviewed.  The review aimed to establish the extent to which the financial statements were consistent with the Guidelines and identify areas that companies need to take into account when preparing their December year-end strategic reports. 

The thematic review firstly looked at consistency with the Guidelines.  Key findings in this respect included:

• With the exception of one company, all companies provided definitions of at least the most significant APMs used together with reconciliations to IFRS measures where appropriate.
• Descriptions of APMs were not misleading and made it clear what the APM was. Descriptions were less clear for some of the items excluded in arriving at adjusted measures of profit.
• There were varied explanations given as to how companies had determined that it was beneficial to disclose APMs. Whilst all FTSE 100 and FTSE 250 companies provided some explanation this was not so true of the smaller companies in the sample.  Some companies provided “cursory, boilerplate” explanations.  The FRC has indicated that “a good explanation states why an APM is useful, helpful or more meaningful rather than asserting that this is the case and clarifies whether an APM is used internally, why it is so used, by whom and for what purpose”.  It urges companies to ensure that their explanations “properly reflect why they believe the additional information is useful to investors and other users of their accounts”. 
• Seven companies in the sample had made changes to ensure greater consistency with the Guidelines. Changes were largely made to give either new or enhanced explanations for their use of APMs.    

As well as assessing consistency with the Guidelines, the thematic review in particular looked at how the adjusted measures of profit were defined, how they were disclosed and how they differed from the corresponding IFRS measure.  Within the sample, 18 used adjusted measures of profit.  Key findings in this respect included:

• There were a wide variety of terms used to refer to adjusted measure of profit including ‘adjusted’ and ‘normalised’. In 78% of cases, this alternative measure of profit was higher than the equivalent IFRS measure.
• Some of the definitions gave rise to concerns about why certain items, in particular ‘restructuring costs’ had been excluded from the measure. The FRC indicates that better explanations as to why such items had been excluded would help to mitigate such concerns.  The FRC draws attention to its press release in December 2013 regarding consistency in the reporting of exceptional items. 

The FRC indicates that in its reviews of the December 2016 accounts it will question companies where: 

• Good explanations for the use of APMs and for any changes made in the APMs used, including changes in definition, are not provided.
• Good explanations of why items have been excluded from adjusted measures of profit are not provided and, in particular, where an item is excluded from adjusted profit that it has not seen others exclude.
• A description such as non-recurring is used and that description does not appear to apply in the circumstances.
• There is no discussion of either the IFRS results themselves or of the adjustments made to those results to arrive at adjusted profit.
• The IFRS results are not highlighted at an early point in the narrative. 

The press release and thematic review are available on the FRC website.