## **Learning Outcomes**

After reading this article, you will be able to:

- Define and explain additional performance measures (APMs) and why companies report them.
- Describe narrative reporting—including management commentary—and its benefits for investors.
- Identify how APMs and narrative disclosures support decision-making, risk assessment, and communication with stakeholders.
- Recognise issues of presentation, comparability, and transparency in APMs and narrative reports.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand both financial and narrative aspects of corporate reporting and how these influence stakeholders’ decisions. Focus your revision on the following relevant syllabus areas:

- The importance and challenges of APMs in financial analysis and external reporting
- The role and content of management commentary in narrative reporting frameworks
- How narrative reports (including management commentary) contribute to investor communication
- Evaluating the usefulness and limitations of non-IFRS performance measures and narrative reporting
- The qualitative characteristics of useful information in management commentary (e.g., relevance, faithful representation)
- Critiques of corporate reporting and developments in non-financial 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._

1. In published financial statements, which of the following best describes an “Additional Performance Measure” (APM)?  
   a) Any figure calculated in line with IFRS  
   b) A ratio or subtotal calculated outside the framework of IFRS and highlighted by management  
   c) The statutory profit after tax figure  
   d) Any number based on historical cost
2. State two potential risks of entities prominently disclosing APMs in their annual reports.
3. True or False? Management commentary should only discuss financial performance, not business risks or strategy.
4. Explain one way narrative reporting via management commentary improves investor communication.
5. Which qualitative characteristic of useful information is directly challenged if APM definitions and calculations change year-on-year without disclosure?

## **Introduction**

Recent ACCA exam sessions include scenarios where management present APMs—like 'core earnings' or 'EBITDA'—and provide expansive narrative commentaries in their corporate reports. These practices support transparency and decision usefulness for investors but also raise questions about consistency and comparability.

APMs offer supplementary financial information outside the formal requirements of IFRS. Narrative reporting, especially through management commentary, provides important context and forecast-oriented analysis—going beyond statutory disclosures to explain business models, future prospects, risks, strategy, and key performance indicators (KPIs).

Understanding the rationale, benefits, and potential issues related to both APMs and management commentary is essential for responding to SBR exam requirements concerning investor communication and critical analysis of reporting practices.

> **Key Term: Additional Performance Measure (APM)**  
> An APM is a financial metric, ratio, or subtotal reported by management that is not mandated by IFRS but presented to supplement or adjust IFRS figures—often intended to show 'core' or 'recurring' performance.

## ADDITIONAL PERFORMANCE MEASURES (APMs)

### What are APMs?

APMs are non-IFRS measures such as 'core profit', 'EBITDA', 'core operating income', or 'free cash flow'. Unlike IFRS figures, APMs may exclude certain items (e.g., restructuring costs, fair value gains/losses, or non-recurring items) to highlight what management believes is a better measure of ongoing performance.

> **Key Term: Narrative Reporting**  
> Narrative reporting refers to non-financial or descriptive disclosures—such as management commentary or strategic reports—that explain business performance, strategy, risk, and future outlook outside of the primary financial statements.
>
> **Key Term: Management Commentary**  
> Management commentary is a forward-looking narrative section accompanying the financial statements. It provides management’s analysis of the company’s performance, position, key risks, and future outlook, usually tailored for investor needs.

### Why do companies use APMs?

APMs are used to:

- Present adjusted or 'core' profit unaffected by non-recurring or unusual items
- Provide performance metrics aligning with management’s internal reporting or industry KPIs
- Inform investment decisions and comparisons within or across sectors

However, lack of standard definitions means APMs may be calculated differently by different entities or even change from year to year in the same entity.

### **Worked Example 1.1**

A retailer presents 'adjusted operating profit' by excluding impairment losses and restructuring costs, resulting in a higher figure than the IFRS operating profit shown in the statement of profit or loss.

_Required:_ What are two benefits and two potential drawbacks for investors of the company reporting this APM?

> **Answer:**  
> _Benefits:_
>
> - Adjusted profit may better reflect recurring performance by excluding unusual items.
> - Enables easier comparison with peer companies reporting similar APMs.  
>   _Drawbacks:_
> - Lack of standard definition reduces comparability and may mislead users.
> - Selective exclusion of items could be used to portray a more favourable picture.

### Issues with APMs

The main concerns with APMs for users and regulators are:

- Lack of transparency: Definitions can be unclear or not reconciled to IFRS numbers
- Inconsistency: Calculations may change over time or between entities
- Bias: APMs can be manipulated to present performance in a better light
- Prominence: If given more attention than IFRS measures, users may focus on less reliable figures

Regulators such as the European Securities and Markets Authority (ESMA) issue guidelines requiring:

- Clear definitions
- Reconciliations to IFRS numbers
- Consistent calculation
- Explanation for changes in methodology

### **Exam Warning**

> In the exam, avoid assuming that all reported measures are comparable across companies. For each APM, always explain its calculation, highlight differences from IFRS figures, and discuss possible impacts on faithful representation.

## NARRATIVE REPORTING AND MANAGEMENT COMMENTARY

### Purpose and Content

Narrative reporting—principally through management commentary—expands on the financial statements, offering:

- Business model and strategy explanations
- Discussion of principal risks and uncertainties
- Analysis of operational and non-financial KPIs
- Management’s view on future prospects

This contextual information is highly valued by users, especially investors, who seek deeper understanding of sustainability, risk management, and strategy execution.

### International Practice Statement

The IFRS Practice Statement on Management Commentary recommends that narrative reporting:

- Focuses on matters critical to understanding the company’s future
- Addresses both financial and non-financial information
- Is consistent with the financial information but does not duplicate it
- Presents clear, entity-specific details (not boilerplate responses)

### Qualitative Characteristics

Narrative reporting should meet the fundamental and enhancing qualitative characteristics of useful information:

- Relevance: Focusing on information that affects investors’ decisions
- Faithful representation: Complete, neutral, and error-free content
- Comparability: Presented consistently over time and, where possible, across entities
- Understandability and timeliness

### **Worked Example 1.2**

A manufacturing group’s management commentary describes its new sustainability initiatives, provides an update on negotiations for supply contracts, and sets out operational KPIs alongside explanations for changes.

_Required:_ Explain two ways this narrative reporting benefits current and potential investors compared with financial statements only.

> **Answer:**
>
> - Disclosures on sustainability and supply chain risks help investors assess future risks to cash flows and reputation.
> - Operational KPIs and management explanations enable users to understand performance drivers, supporting better forecasting and decision-making.

### Limitations of Narrative Reporting

Potential challenges include:

- Use of generic statements instead of company-specific analysis (‘boilerplate’ narratives)
- Omission of negative aspects or risks
- Lack of consistency and comparability, especially when KPIs or discussion focus change year-to-year
- Information overload or excessive duplication

## APMs, NARRATIVE REPORTING, AND INVESTOR COMMUNICATION

Narrative reporting and APMs are key tools for management to communicate with investors. Used properly, they assist in:

- Deepening understanding of financial and strategic matters
- Clarifying management’s view of performance, strategy, and outlook
- Providing context to financial statements, supporting more informed decisions

Investors increasingly expect companies to be transparent about not only results but also the risks and uncertainties faced, as well as future strategies.

> **Key Term: Investor Communication**  
> Presentation and disclosure of information—both financial (including APMs) and non-financial (through narrative reporting)—aimed at supporting users' economic decisions and engagement with management.

## **Summary**

APMs and narrative reporting (including management commentary) are now standard practice in corporate communication. While offering valuable context, they also pose risks related to consistency, comparability, and faithful representation. As an ACCA candidate, you must be able to discuss both the benefits and potential downsides of APMs and narrative commentaries, especially from an investor’s viewpoint.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and explain the role of APMs and describe common examples found in annual reports
- Describe narrative reporting frameworks, with a focus on management commentary
- Discuss how APMs and management commentary improve or detract from investor communication
- Identify risks associated with the inconsistent or misleading presentation of APMs
- Explain requirements and best practices for narrative reporting (consistency, clarity, relevance)
- Evaluate the impact of APMs and narrative reports on decision-usefulness for exam scenarios

## **Key Terms and Concepts**

- Additional Performance Measure (APM)
- Narrative Reporting
- Management Commentary
- Investor Communication

APMs and narrative reporting - Management commentary and investor communication