APMs and narrative reporting - Regulatory guidance and discl...

Learning Outcomes

After reading this article, you will be able to explain the regulatory context for Additional Performance Measures (APMs) and narrative reporting, identify key disclosure expectations, and apply best practice for transparent external reporting in accordance with ACCA SBR requirements. You will recognise how to distinguish between APMs and statutory measures, outline necessary reconciliations, and evaluate the implications of poor disclosure.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand the regulatory requirements and best practice relating to the use and disclosure of alternative performance measures (APMs) and narrative elements in corporate reporting. This includes:

• The distinction between APMs and statutory financial information
• Regulatory expectations regarding the presentation and reconciliation of APMs
• Key principles of narrative reporting, including management commentary and the fair presentation of non-financial information
• Disclosure requirements for using APMs in annual reports or other public communications
• Critical evaluation of transparency, objectivity, and reliability in performance 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. Which of the following best describes an Additional Performance Measure (APM)?
   1. Any measure defined by IFRS or local GAAP only
   2. Any performance metric not specified within accounting standards
   3. Any key audit matter presented by management
   4. Any statutory line item in the income statement

2. True or false? When using APMs in corporate reporting, there is no requirement to provide a reconciliation to the closest statutory measure.

3. A company calculates “core profit” by excluding restructuring charges and one-off impairment losses. Which key disclosure principle has NOT been satisfied if it fails to clarify how “core profit” is derived?

4. Briefly explain one risk to users if an entity gives undue prominence to APMs compared to statutory measures in its annual report.

Introduction

Increased focus on transparency and accountability in corporate reporting means that regulators have issued guidance on the presentation and disclosure of Additional Performance Measures (APMs) and narrative information. APMs, such as "adjusted EBITDA" or "core profit," are frequently used by management to supplement statutory financial data, but may not be defined by IFRS or national GAAP. Narrative reporting—including management commentary and operating reviews—provides non-financial context and explanatory information for users.

Understanding the regulatory framework and disclosure requirements is essential for ACCA SBR candidates, particularly as misuse of APMs and poor-quality narrative reporting can undermine the reliability of corporate reports.

Key Term: Additional Performance Measure (APM)
A numerical performance indicator published externally by management, not defined within accounting standards or the financial statements, and often intended to provide supplemental understanding into an entity's performance.

Key Term: Narrative Reporting
The provision of non-financial, explanatory, or qualitative information in corporate reports, intended to support, contextualise, or explain financial results.

The Role and Risks of APMs

Companies often use APMs to explain their performance in a manner that management believes is more representative of “core” operations, frequently adjusting for one-off items, non-cash charges, or other exclusions.

Regulatory Focus

Regulators and standard setters—including ESMA, the FRC, and the IASB—require that APMs presented alongside statutory financial results comply with specific principles:

• APMs must be clearly defined and labelled.
• APMs cannot be given greater prominence than measures defined by IFRS or GAAP.
• APMs should be presented with reconciliations to the closest IFRS-defined measure.
• Explanations must be provided for why an APM is used and how it helps users.

Failure to abide by these can mislead users, obscure true performance, and reduce comparability across companies and periods.

Key Term: Statutory Measure
An amount calculated in accordance with applicable accounting standards and included in the audited financial statements.

The Risks of Prominence and Manipulation

When APMs are highlighted more than statutory results, there is a risk that management is presenting performance in an unduly positive light. Selective adjustments and lack of clear reconciliation may impair faithful representation and comparability, contravening the qualitative characteristics outlined in the Conceptual Framework.

Worked Example 1.1

A listed company announces “core net profit” in its press release and annual report, calculated as profit before tax, adjusted to exclude restructuring costs, impairment of goodwill, and changes in pension assumptions. The term “core net profit” is mentioned on the cover page, whereas the statutory profit before tax is mentioned only in the notes.

Question: Has the company complied with APM disclosure best practice? If not, what are the main issues?

Answer:
No. The company has not complied because:

• The APM (“core net profit”) is given undue prominence relative to statutory profit before tax.
• The rationale and reconciliation to the statutory measure are not provided.
• The specific items excluded are not clearly explained. These omissions may mislead users or present an unbalanced view of financial performance.

Disclosure Expectations for APMs

Key regulatory disclosure requirements for APMs can be summarised as:

• Define each APM precisely, avoiding ambiguous or inconsistent terminology.
• Explain why the APM provides useful information to users.
• Reconcile APMs to the most comparable IFRS or statutory measure.
• Present APMs with equal or lesser prominence than statutory results.
• Ensure APM calculations are consistent across periods; if methodology changes, this must be disclosed along with rationale and restated comparatives.
• Clearly disclose any limitations or subjectivity inherent in the measure.

Key Term: Reconciliation
A detailed calculation or bridge that links an APM to the nearest directly comparable statutory IFRS or GAAP measure.

Worked Example 1.2

A company presents “EBITDA before exceptional items” as an APM in their annual report, but does not define what is considered “exceptional,” nor do they provide a reconciliation to the income statement.

Question: What disclosure principles have not been met?

Answer:
The company has failed to define “exceptional items” and has not provided a reconciliation or explanation for the use of the APM. Both are required for transparent reporting.

Exam Warning

In the exam, do not assume that any APM in a scenario is acceptably disclosed unless a reconciliation and justification are provided. Marks are available for identifying missing reconciliation and for discussing user impact.

Narrative Reporting: Principles and Requirements

Narrative reporting typically includes management commentary, directors’ reports, or operating and financial reviews. These serve to explain, supplement, or contextualise financial results.

Key principles for robust narrative reporting are:

• Narrative statements must be relevant, specific, and entity-focused—not generic or boilerplate.
• Information must be balanced, discussing both positive and negative developments.
• Non-financial and future-oriented matters (risk management, market trends, sustainability) should be discussed where material.
• Forward-looking statements and assumptions must be supported by transparent, unbiased reasoning.

Key Term: Management Commentary
A narrative statement provided by management, covering performance analysis, strategy, risks, and future outlook, designed to help users interpret the financial statements and assess stewardship.

Worked Example 1.3

The directors’ report for a medium-sized manufacturer states, “The year was successful with good prospects ahead,” but does not reference known supply chain issues, competitive threats, or ongoing restructuring.

Question: What qualitative reporting flaws are present?

Answer:
The narrative is unbalanced and lacks relevant, specific disclosure. It fails to mention significant risks and ongoing restructuring, compromising faithful representation and leaving users uninformed about real challenges.

Regulatory Guidance and Best Practice

Both APM and narrative disclosures are increasingly regulated and subject to scrutiny by auditors and enforcement authorities. Regulatory best practice is distilled in the following principles:

• Clarity: Avoid ambiguous terms, explain all figures used.
• Objectivity: Disclose factual and forward-looking information in a balanced fashion.
• Consistency: Present measures regularly over time and across publications.
• Accessibility: Place required disclosures in the main body, not just footnotes.
• Reconciliation and Transparency: As above, link all APMs to statutory results and define calculations.

Key Term: Prominence
The principle that statutory and IFRS-defined metrics should not be overshadowed by management-defined APMs in published reports.

Revision Tip

On exam day, include specific references to reconciliation, definition, reasoning, and prominence criteria when evaluating management’s reporting of APMs or narrative commentary.

Summary

APMs can help explain performance, but regulatory guidance requires they be rigorously defined, reconciled, and not elevated above audited results. Narrative reporting should communicate relevant, balanced, and specific information about both financial and non-financial matters. Transparent disclosures support reliable decision-making for users and meet ethical standards expected in ACCA SBR.

Key Point Checklist

This article has covered the following key knowledge points:

• Define APMs and distinguish them from statutory measures and narrative reporting
• Identify regulatory requirements for APM disclosure, including reconciliation and explanation
• Recognise the risks of giving APMs undue prominence or failing to provide balanced narrative reporting
• Describe best practice for management commentary and narrative disclosures
• Apply exam techniques for analysing APM use and narrative reporting in scenario questions

Key Terms and Concepts

• Additional Performance Measure (APM)
• Narrative Reporting
• Statutory Measure
• Reconciliation
• Management Commentary
• Prominence