Investors OK with use of non-GAAP measures, confused about whether they are audited: XRB

XRB chief executive Warren Allen said "a lot of respondents assumed they had been subject to audit, which is not the case"

New Zealand investors are generally happy to rely on alternative financial reporting measures used by companies, provided they also have access to GAAP numbers, but are confused about whether the non-standard numbers are audited. Generally, they aren't.

That's one of the conclusions of a survey released this month by the External Reporting Board, the statutory body that sets reporting standards required under a range of New Zealand laws including the Companies Act. The XRB surveyed 87 external users of financial reports between November last year and January this year on whether alternative performance measures (APMs) such as 'underlying profits', 'normalised profits', earnings before interest and tax, and earnings before interest, tax, depreciation and amortisation are useful.

Those polled were evenly divided between professionals and non-experts, or mums and dads. It showed that 67 percent found APMs useful and a further 22 percent found them sometimes useful, while just 12 percent said they weren't useful, with some indicating cynicism that they were being used to "massage the figures" or "put a rosy gloss on performance." The survey also found they were generally used to supplement, or in conjunction with, GAAP measures and those polled deemed it important that there be clear reconciliation with GAAP numbers.

GAAP stands for generally accepted accounting practice, meaning globally accepted. In New Zealand's case accepted practice is the NZ version of the International Financial Reporting Standards.

Those polled also said they had a preference for APMs to have clear, standardised definitions and also wanted them to be "assured" or audited, meaning they had been independently verified. But in the conclusions to the survey, the XRB said there was "a lack of clarity and understanding of whether an APM and related information are assured or not, particularly where the information is not included within the audited financial statements, or where components of the APM are taken from audited statements."

"There's a need for clarity about whether this information has been subject to audit of some form of assurance because the market is confused," said XRB chief executive Warren Allen. "A lot of respondents assumed they had been subject to audit, which is not the case."

APMs typically appeared in the information packs and presentations provided to analysts, the media and shareholders rather than in a company's financial statements, he said.

The release of the survey comes as the Financial Markets Authority updates its guidance note for disclosure of non-GAAP financial information. It published the new guidance on its website today, having put out a provisional update for feedback in March.

The new guidance says non-GAAP information shouldn't be presented "with undue and greater prominence than the most comparable GAAP financial information". That follows a review that showed entities often highlighted non-GAAP information that "in many cases" resulted in an unbalanced view of their performance.

The FMA's updated note also calls for equal treatment of one-off or non-recurring items, so that all such items are taken into account and a company "avoids cherry-picking". However, the note also removes the need for every document to provide a reconciliation of the APMs with their GAAP equivalents, so long as there's a link to where the information can be found.

The FMA reviewed uptake of its 2012 guidelines in 2013, looking at 23 major listed companies which generated a total GAAP profit of $2.3 billion and a non-GAAP profit of $4.1 billion, an additional 76 percent of profit. It found that 17 of the 23 reported a non-GAAP profit greater than their GAAP profit. It also found greater prominence given to non-GAAP measures and instances where "communications were overwhelmed by multiple non-GAAP measures with little or no emphasis on the GAAP measure."

One measure, in particular, raised the most concerns - ebitda or earnings before interest, tax, depreciation and amortisation - a metric so popular it's used by eight of the 10 companies on the NZX 10 Index. The other two use either ebit (earnings before interest and tax) and underlying earnings. Z Energy's preferred measure is "replacement cost operating earnings before interest, taxation, depreciation (including gains and (losses) on the sale of fixed assets), amortisation and fair value movements in interest rate derivatives and movements in decommissioning and restoration provision".


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It is fairly obvious why so many reporting entities try to highlight non-GAAP measures .." 17 of the 23 reported a non-GAAP profit greater than their GAAP profit ". These organisations do not want readers to focus on the poor performance that GAAP measures disclose. Whilst non-GAAP measures may assist in improving the overall understanding of organisation performance, those measures should not be treated as acceptable substitutes for GAAP.

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