Learning Outcomes
This article covers alternative performance measures (APMs) and narrative reporting as tested in ACCA SBR. You will learn what APMs are, why they are used, and the risks and benefits for users. You will understand regulatory guidance (ESMA, FRC), requirements for transparent disclosure, and common exam pitfalls. By the end, you should be able to evaluate and assess APM disclosures and narrative reporting practices for ACCA exam scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the reporting and interpretation of APMs and narrative disclosures, along with the ethical and practical challenges involved. Key areas covered in this article include:
- The definition and purpose of alternative performance measures (APMs)
- Regulatory requirements and best practice for APM disclosure (ESMA, FRC)
- Distinction between GAAP and non-GAAP measures
- The role and risks of narrative reporting and management commentary
- Criticism, benefits, and ethical considerations of non-GAAP reporting
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What are alternative performance measures (APMs) and how do they differ from GAAP measures?
- List two key requirements for APM disclosure according to ESMA or FRC guidance.
- Explain one risk and one benefit of using APMs in published financial statements.
- True or false: Narrative reports must only include information prescribed by IFRS Standards.
- Give an example of how an APM could mislead users if presented inappropriately.
Introduction
Narrative reporting and the use of alternative performance measures (APMs) are essential elements of modern financial reporting, particularly in published annual reports and corporate communications. APMs—also referred to as non-GAAP measures—are financial metrics not specifically defined by IFRS Standards, such as “core profit,” EBITDA, or adjusted earnings. APMs are widely used by preparers and are often highlighted in press releases and investor presentations to offer additional understanding of business performance.
However, the selection, calculation, and presentation of non-GAAP measures can also obscure the true performance and introduce bias, unless their use is carefully justified and transparently disclosed. ACCA SBR requires you to understand the definitions, regulatory guidance, exam risks, and analytic importance of both APMs and narrative reporting. You should be able to critically assess both their usefulness and their potential to mislead.
Key Term: alternative performance measure (APM)
A financial metric used in external reporting that is not defined or required by IFRS but is intended to supplement GAAP measures.Key Term: non-GAAP measure
A performance metric or adjustment presented in financial communication that does not strictly follow IFRS or local GAAP.Key Term: narrative reporting
Additional commentary in corporate reports that provides context, explanation, and forward-looking information, going beyond the numbers.
Purpose and Examples of APMs
APMs are used to provide investors and other users with information that management considers relevant in understanding core trends, excluding items considered “non-recurring,” “non-cash,” or otherwise not representative of ongoing performance. Common APMs include:
- “Core profit” or “adjusted profit”
- EBITDA (earnings before interest, tax, depreciation, and amortisation)
- Free cash flow
- Net debt
Preparers typically use APMs to strip out items such as restructuring costs, impairment, fair value movements, or other non-operating income and expenses, making performance easier to compare across years or with similar businesses.
Regulatory Guidance and Disclosure Requirements
Both European and UK regulators provide explicit guidance for APMs in external reporting. The European Securities and Markets Authority (ESMA) and the UK Financial Reporting Council (FRC) have set out principles to ensure that APMs are used appropriately.
Key requirements for APM disclosure include:
- Providing clear definitions for each APM used
- Reconciling APMs to the nearest GAAP measure (e.g., IFRS profit)
- Disclosing the reason for using each measure and why management believes it is useful
- Ensuring APMs are presented with less or equal prominence than GAAP measures
- Labeling APMs accurately and avoiding misleading titles
Key Term: APM reconciliation
A bridge showing how each alternative performance measure is derived from the most directly comparable GAAP measure.
Benefits and Risks of APMs
Benefits
- Improve comparability across periods and with competitors, if consistently calculated
- Provide management’s view of “core” or “fundamental” performance
- Support decision-making for investors seeking information beyond standard profit figures
Risks
- May be misleading if inconsistent, poorly defined, or overly prominent
- Potential for selective adjustment or “cherry picking” of items to show results in a more favourable light
- Confuse users if multiple APMs are provided with little explanation
Key Term: cherry picking
The practice of including or excluding specific items in an APM to influence or bias the reported result.
Worked Example 1.1
ABC plc’s results announcement highlights "core profit before tax," which excludes a one-off impairment of $20m, restructuring costs of $10m, and fair value losses of $5m. IFRS profit before tax is $65m.
Required: Calculate the reported "core profit before tax." What disclosure should accompany this measure?
Answer:
Core profit before tax = $65m (IFRS) + $20m + $10m + $5m = $100m. In accordance with regulatory guidance, ABC plc should:
- Define “core profit before tax”
- Reconcile it to the IFRS profit before tax
- Explain that core profit excludes specified adjustments and why management presents it
- Ensure this figure does not receive greater prominence than IFRS profit
Exam Warning
Regulators and examiners expect APMs to supplement, not replace, GAAP measures. Marks may be lost if you fail to justify the use of an APM or neglect required reconciliations.
Criticism of APMs and Ethical Considerations
Critics warn that APMs may diminish comparability if different companies use different adjustments or change definitions year-on-year. There have been concerns that APMs can disguise deteriorating results, especially if managers highlight favourable non-GAAP metrics while relegating negative GAAP results to the notes.
Ethical reporting practice requires that any use of APMs be transparent, consistent, and avoid giving a misleading impression. Accountants must apply the fundamental ethical principles—integrity, objectivity, and professional competence—in selecting, calculating, and reporting APMs.
Key Term: GAAP measure
A financial metric calculated in full compliance with generally accepted accounting principles (e.g., IFRS, UK GAAP).
Narrative Reporting and Management Commentary
Narrative reporting refers to explanatory material included in the annual report, financial statements, and other communication. This can range from the management’s strategic report, operating and financial review, directors’ reports, to other forms of management commentary.
Effective narrative reporting should:
- Provide context for the financial numbers (e.g., strategic aims, risks, and future developments)
- Discuss significant judgements, estimates, and the reasoning behind adjustments or the exclusion of items
- Explain the basis for APM adjustments and any changes in definitions or calculations from previous periods
Key Term: management commentary
The section of a report in which management explains financial results, forward-looking strategies, and critical estimates or future risks.
Worked Example 1.2
A listed entity includes an APM called “core earnings,” which excludes foreign exchange losses, regulatory fines, and amortisation of acquired intangibles. Neither the definitions nor the calculation method has been disclosed and “core earnings” is presented in bold as the first figure in the results table.
Required: Identify compliance issues and risks for users.
Answer:
- Omission of APM definition and reconciliation breaches ESMA/FRC guidance.
- Promoting “core earnings” over actual profit could mislead users.
- Excluding regulatory fines without explanation may conceal key risks.
- Inconsistent calculation of APMs impairs comparability. The company risks regulatory sanction and a loss of stakeholder trust.
Revision Tip
For the exam, always discuss the disclosure requirements and potential risks of misleading users when commenting on APMs.
Limitations and Best Practice
APMs can expose users to risk unless:
- Calculations are clearly explained and consistently applied
- Management commentary addresses the selection of adjustments objectively
- Users can reconcile APMs to GAAP figures
Best practice is to use APMs to improve rather than obscure transparent reporting.
Summary
APMs and narrative reporting supplement GAAP financial statements by offering management’s view of performance. While useful for contextualising results, their use must comply with regulatory guidance: clear definitions, reconciliation to IFRS figures, consistency, and prominence no greater than GAAP measures. Ethical principles require transparent and fair presentation to avoid misleading stakeholders.
Key Point Checklist
This article has covered the following key knowledge points:
- Define and identify APMs and non-GAAP measures, explaining their differences from GAAP metrics
- Explain regulatory disclosure requirements (ESMA/FRC) for publishing APMs
- Discuss the benefits and risks of presenting APMs in external reports
- Critically evaluate and identify good and poor APM disclosures and narrative reporting
- Recognise the importance of ethical considerations when preparing non-GAAP information
- Understand best-practice features of narrative and management commentary disclosure
Key Terms and Concepts
- alternative performance measure (APM)
- non-GAAP measure
- narrative reporting
- APM reconciliation
- cherry picking
- GAAP measure
- management commentary