GAAP rarely tells the whole story of a company’s performance. To bridge the gap, companies and investors communicate through key performance indicators (KPIs)1, alongside the GAAP numbers.
This topic has prompted much debate. When do KPIs enhance GAAP by aiding communication with users, and when do they present a confusing or overly optimistic picture? To date, varied regulatory approaches have resulted in inconsistent requirements. But there now seems to be consensus building globally.
IOSCO, the international association of regulators, has issued a statement on non-GAAP financial measures, which brings its approach further in line with the guidelines issued by ESMA2, the European regulator, a year ago.
“A global consensus on the regulation of non-GAAP information will benefit all stakeholders in the financial reporting process. The IOSCO statement is a step forward.”
IOSCO, like ESMA, includes in the scope of its statement any non-GAAP financial measure that a company discloses outside of its financial statements. Both bodies acknowledge that non-GAAP financial measures can be useful to investors and that potential issues are created by inconsistent use, inadequate definition and undue prominence.
Balancing these factors, each organisation is keen to promote a solution based on enhanced transparency and comparability (see Summary of key facts below ).
IOSCO’s statement brings its approach closer to ESMA’s in terms of the scope and presentation of non-GAAP financial measures. The general alignment of approach by these two bodies can be seen as a positive step towards global harmonisation.
Furthermore, IOSCO’s statement and ESMA’s guidelines are broadly similar to the requirements on the presentation of subtotals introduced by the recent IASB Disclosure Initiative – Amendments to IAS 1. As such, consistent disclosure principles will apply to APMs whether they are presented within or outside of financial statements.
Further action is needed from all stakeholders:
IOSCO's definition of a non-GAAP financial measure
A numerical measure of an issuer’s current, historical or future financial performance, financial position or cash flow that is not a GAAP measure.
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1 Such KPIs are referred to, interchangeably, as ‘non-GAAP measures’ and ‘alternative performance measures’ (APMs).
2 European Securities and Markets Authority; Guidelines on Alternative Performance Measures.
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