Earlier this year, the IFAC Professional Accountants in Business (PAIB) Committee issued proposed International Good Practice Guidance, Developing and Reporting Supplementary Financial Measures, for public comment. The final version of this guidance is set to be released soon, but I can offer you a sneak peek today.
This proposed guidance from last February looks to establish a benchmark for using supplementary financial measures—such as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA); Underlying Profit; Net Debt; and Free Cash Flow—in order to improve understanding by management, investors, and other stakeholders of an organization’s performance.
Building on the qualitative characteristics of useful financial information, the proposed guidance recommends professional accountants consider a number of attributes when developing and reporting supplementary financial measures. The proposed guidance also provides a number of tips for disclosure of supplementary financial measures. The principles in this guidance can also form a basis for non-financial measures, such as the quantitative parts in sustainability reporting or integrated reporting.
The Exposure Draft was developed with significant contribution from CPA Canada, especially Chris Hicks, CPA, CA, Principal, Research, Guidance, and Support, CPA Canada, and with input from the PAIB Committee’s Business Reporting Advisory Group.
The proposed guidance received multiple responses from organizations across the world. The responses were largely supportive and included some very positive comments:
- “The report is a very good and valuable initiative as it deals with the comparability, consistency, and transparency of supplementary financial measures.”
- “The guiding principles on preparation of the reports and the necessary disclosures serve as a clear guidance on the quality requirements on the internal and external reports.”
- “[We] believe that the publication of this document for accountants in business can only result in benefits.”
- “The guidance will be very useful, especially where the information need is outside the ambit of the conventional financial position of an organization.”
Many of the respondents also provided detailed suggestions to further improve the guidance.
Interestingly, however, not all respondents were keen on the use of supplementary financial measures in the first place. The Institute of Management Accountants, for example, argued in its response that while they “strongly support the PAIB Committee’s strategy of issuing guidance that will foster the adoption and use of good business principles and practices by professional accountants in business as they function in their various roles,” it “[does] not support the practice of US companies publicly reporting non-GAAP enterprise earnings performance measures that are individually designed, are not subject to independent attestation, and may be inconsistent over time and non-comparable among entities in the same industry. This practice is likely to add complexity to the public reporting process and may cause confusion on the part of readers. It could also add to management’s temptation to present better results that match market expectations and maximize their own bonuses.”
The PAIB Committee, on the other hand, recognizes that many users want to supplement GAAP-reported information with management’s perspective on the organization’s performance. Through this guidance, the committee provides principles regarding the qualities a measure should have and disclosures that should accompany them if reported externally.
Some respondents also noted the other supra- or international initiatives that are currently ongoing in this area, such as by the European Securities and Markets Authority. These respondents questioned whether it would not be wiser to leave this issue to regulators. In our view, however, it is important to provide professional accountants in business with this guidance on best practices, without regard for the regulatory views. In fact, we believe that if entities would largely follow our guidance, there wouldn't be any need for regulatory rules! However, we included resources from some of these entities in the appendix of our guidance.
Following receipt of these comments and feedback, the guidance development team subsequently performed a detailed analysis and revised the guidance as needed. We then conducted additional consultations on proposed changes and are currently in the last stages of finalizing the guidance.
When released in final form, the guidance will serve as a reference document for professional accountants and their colleagues who develop and publish supplementary financial, and also non-financial, measures for their organization.
