Performance Reporting and non-GAAP Measures
So called “alternative performance measures” (also known as non-GAAP), which are financial measure of historical or future financial performance, financial position, or cash flows that are not defined in a financial reporting framework such as IFRS or GAAP, are increasingly common. An example of this technique is EBITA (Earnings before Interest, Taxes, and Amortization). Executives like non-GAAP measure because it allows them to exclude “exceptions” that may be one-time occurrences. Unfortunately, such figures also allow executives to sometimes paint a biased picture. So while one could see that while these non-GAAP disclosures could be useful in providing a nuanced view of a firm’s financial picture, they should be used judiciously and with guidance provided by supervisory authorities. (ESMA, for example, provided just such guidance for firms issuing a prospectus after 3 July of this year).
IASB Chair Hans Hoogervorst has weighed in on the issue, calling for some basic ground rules, including that non-GAAP measures should not be misleading and should not be given higher prominence over figures that are in his words “neutral, comparable, and verifiable”. He sees a role for the IASB (and we would think FASB as well) in creating stronger guidance and definitions in this area. Hoogervorst’s speech last year to the the Korean Accounting Association and the Korean Accounting Standards Board covers the issue in depth, as does a more recent talk he gave to the European Accounting Association in Maastricht, the Netherlands.
XBRL data can also play a role in mitigating the use of non-GAAP measures. If companies report in structured XBRL format, then analysts can immediately “look through” to the GAAP performance and make their own assessment about the performance report that the company is making.