Comments from ACCA to the Board of the International Organization of Securities Commissions (IOSCO)
5 December 2014
Non-GAAP measures do have a role in providing information needed by stakeholders, and it can be argued that they are becoming more common, as well as developing significant differences between entities and industries. ACCA supports IOSCO’s initiative to ensure that non-GAAP measures are presented in an acceptable and informative way by preparers. As explained in our specific comments below, we believe that IOSCO and the IASB would benefit from liaising with each other in this area.
Key considerations in the presentation of non-GAAP measures are consistency between periods, an understanding of the calculation of a measure, and how non-GAAP information relates to that presented in accordance with IFRS. In our specific comments, we have explained the ways in which this might be better achieved, such as through reconciliations and appropriate explanations.
We believe that IOSCO needs to be specific in a number of areas concerning non-GAAP measures. These include the provision of guidance in the form of examples illustrating the expectations set out in IOSCO’s paper, and also a description of items which mainly cannot acceptably be adjusted out in arriving at commonly-presented measures, such as ‘normalised earnings’.
Finally, we have included comments below on the external assurance of non-GAAP measures, and also on a specific part of the IOSCO paper.
We believe that IOSCO should set principles for non-GAAP measures, which regulators can then enforce consistently across jurisdictions. As non-GAAP measures represent a particular, and arguably individualistic, way for entities to communicate with their stakeholders, it may only be possible for these principles to be set at a high level.
In view of the scope of the IOSCO paper (non-GAAP measures presented outside the financial statements), IOSCO and IASB should liaise over their work. The IASB has been conducting some similar work regarding measures presented within the financial statements (as part of its Disclosure Initiative), and is unlikely to seek to encompass all non-GAAP measures in its work plan. More broadly, the IASB is looking to revise the Conceptual Framework, and has yet to set out definitively the contents of the Statement of Other Comprehensive Income which may result. Work in these areas may give further insights into the content and presentation of non-GAAP measures.
The consistency of presentation of non-GAAP measures is important between periods, although this may be less realistic to achieve as between entities. Period-to-period consistency can be improved through requiring the establishment of definitions for non-GAAP measures which can be shown to be appropriate to the entity over time. Reconciliations (as mentioned in 4. below) and explanations will help in addressing the inconsistency of presentation between reporting entities.
We support the inclusion of explanations as to why items are non-recurring. We note that Expectation 11. in the IOSCO paper states that non-recurring types of item, which are adjusted for in presenting non-GAAP measures, should not be described in terms of being infrequent or unusual . We believe that Expectation 11. should go on to confirm clearly what the description should be, and require an explanation of why the item has been adjusted for.
It would be helpful for IOSCO to provide examples illustrating the expectations set out in its paper. To avoid ‘steering’ reporting entities, these examples could be based on measures which are already very-commonly reported, such as EBITDA. This would help to avoid any impression that IOSCO is encouraging the disclosure of particular non-GAAP measures, and defining their content.
Where preparers are adopting an ‘aggressive’ approach, there is a case for IOSCO looking at what is unacceptable to adjust out. In particular situations, possible examples could be goodwill impairment, regulatory fines and, for a global entity, the economic effect of a sudden economic change in individual markets.
Non-GAAP measures presented outside the financial statements are subject to a lower level of scrutiny by external auditors, although this is not in itself, sufficient justification for a mandatory extension to the role of the external auditors, or the inclusion of every non-GAAP measure within the financial statements. Instead, the financial statements could be required to include reconciliations (as some regulators already require) to the measures presented elsewhere in the Annual Report (and indeed, to any shown within the financial statements).
Expectation 5. in the IOSCO paper guards against using non-GAAP measures to avoid drawing attention to unfavourable information. However, there is also the danger of the measures being used to present other information in an unduly favourable light.
Some of the current opposition to the measures is based on concerns over such manipulation. For example, the measure ‘normalised earnings’ can be used to set executive pay, including for the management which, in fact, can influence that same definition of ‘normalised’ applied by the reporting entity, and which determines their remuneration. Coupled with a lack of effective scrutiny by the entity’s Remuneration Committee, this situation could undermine the effectiveness of Corporate Governance structures.