Before You Set Your Alternative Performance Measures, Read This

An alternative performance measure is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework.

They haven't had much attention yet, but alternative performance measures (APMs) are slowly entering the limelight. Why is that? In a word: regulators. Since APMs let you (to an extent) be your own boss when it comes to customising the terminology and itemisation that fits your firm, they have been widely used. However, ESMA's recent guidelines have taken a stance on APMs and the quality thereof, forcing most companies to do an overhaul on what they disclose.

A recurring debate

2018 has indeed brought a renewed focus on APMs by various regulators, sparking debate and disagreement over how clear they need to be.

The whole purpose of adopting IFRS was to have a unified standard that increases comparability between various companies, allowing investors to (more) easily understand and contrast companies' performances. APMs, one side of the argument goes, undermine this goal.

That being said, managers and investors are not always satisfied with how close IFRS statements can get to calculating that one magic number reflecting "true profit" or "true earnings". They therefore want to seek better measures. The debate is thus centred on which adjustments should be allowed to IFRS figures, and how seriously these adjusted figures can be taken.

All or nothing

ESMA has mentioned three principles that companies should consider when including APMs within their financial statements: purpose, use, and relevance. Each APM should be critically evaluated in terms of these three criteria to ensure that it will pass the...