FMA gives guidance on non-standard earnings measures

BUSINESSDESK: The Financial Markets Authority has issued a guidance note for companies using non-standard earnings measures when making public announcements.

The note on non-Generally Accepted Accounting Principles (GAAP) financial information does not replace legal requirements for accounting standards, rather it aims to get some uniformity in the use of alternatives to the statutory profit figure that can be moved about by non-cash items.

The market watchdog will start assessing non-standard earnings measures against the guidelines from January 1.

"Non-GAAP terms such as 'underlying earnings', 'normalised profit' and 'adjusted earnings' lack standard meaning," head of compliance Elaine Campbell says. "We are setting a minimum standard for how we expect this information to be laid out."

International Financial Reporting Standards became mandatory in 2007, requiring companies to recognise the market value of assets such as property and financial instruments in their financial statements. That sparked disquiet among corporates which claimed they exaggerated the global downturn in 2008.

The FMA received 25 written submissions and has been consulting with chief financial officers of listed companies, independent directors and auditors since November.

The watchdog did not pick up on former Heartland New Zealand finance boss and now Partners Life chief financial officer Sean Kam's submission to put more emphasis on media education, with the threat of sanctions by the FMA for "poor journalism practices".

The submission was officially made by SKMG Consulting.

"Fundamentally, poor journalism is a key source of misunderstanding in the market and therefore directors of issuers should be given the opportunity to provide as much clarity as possible about the IFRS result, potentially by the use of alternative profit measurements or where appropriate (with reference to relevant circumstances – eg, industry specifics, M&A activity, one-off events) place emphasis on underlying profits," Mr Kam says in his submission.

The FMA says it expects the media will become "more informed about GAAP measures vs non-GAAP measures and that this will flow through into their communications" in a blanket response to all submissions.