Learning Outcomes
By the end of this article, you will be able to explain what alternative performance measures (APMs) are, why companies use them, and how they impact investor decision-making. You will understand the risks of APM misuse, summarise the main disclosure requirements, and evaluate the strengths and limitations of APMs as reported in financial statements—key knowledge for Strategic Business Reporting exam scenarios.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the role and risks of alternative performance measures in financial reporting, especially regarding how investors interpret and use them. This article covers:
- The definition and purpose of alternative performance measures (APMs)
- The benefits and risks of APMs for investors and other stakeholders
- Potential for bias and inconsistent calculation of APMs
- Requirements and best practice for APM disclosure
- How to evaluate the usefulness and reliability of non-IFRS performance measures
- The impact of APMs on decision-making in exam scenarios
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.
- Which of the following is most commonly used as an alternative performance measure (APM) in published reports?
a) Net cash from financing activities
b) Earnings per share (basic)
c) EBITDA (Earnings Before Interest, Tax, Depreciation, Amortisation)
d) Revenue - True or false? Companies are required by IFRS Standards to provide reconciliations between APMs and IFRS-compliant figures.
- Explain one advantage and one risk that APMs present for investors.
- List two minimum disclosure requirements for APMs when included in a company's annual report.
Introduction
Investor demand for clear and comparable reporting has led companies to supplement IFRS figures with alternative performance measures (APMs). While APMs can improve understanding of core performance, they also introduce risks if calculated or presented inconsistently. This article reviews core concepts, typical uses, regulatory considerations, and exam-relevant issues regarding APMs and their presentation in financial statements.
What Are Alternative Performance Measures?
Alternative performance measures are numerical measures of financial performance, position, or cash flow that are not defined or specified by international accounting standards but are published by companies in addition to IFRS-reported figures.
Key Term: alternative performance measure (APM)
A financial metric not defined by IFRS or law, presented by companies to supplement statutory financial information, such as EBITDA or 'core profit'.
Companies often present APMs such as EBITDA, free cash flow, adjusted earnings, or 'core profit' to provide additional clarity or to tell their preferred 'story' about operating results. APMs can be included in press releases, management commentary, or investor presentations, as well as in annual reports.
Why Are APMs Used?
APMs are generally intended to:
- Remove or 'adjust out' perceived one-off or non-core items to highlight 'recurring' performance
- Aid comparability within a sector or industry
- Communicate management’s view of sustainable profits
However, the lack of standard definition means different companies may calculate the same APM differently, or may adjust the calculation from year to year.
Benefits and Risks of APMs
Benefits for Investors
APMs can help investors and other users:
- Understand core business profitability by adjusting for exceptional or non-recurring items
- Compare companies more easily (when APMs are consistently used within an industry)
- Assess cash generation using measures like free cash flow
Risks and Limitations
There are inherent risks associated with APMs:
Key Term: earnings management
The use of judgement or adjustments by management to present financial results in a manner intended to achieve particular targets or expectations, sometimes using non-standard measures.Key Term: disclosure
The process of providing relevant explanations, reconciliations, and contextual information to assist users in interpreting reported financial information.
- Adjustments to statutory results may be used to present the company in a more favourable light, sometimes referred to as 'earnings management'
- Lack of comparability across companies due to non-standardised calculations
- Incomplete or unclear explanations reduce users’ ability to understand, compare, and rely on APMs
- Over-emphasis on APMs can divert attention from IFRS-compliant figures, increasing the risk of users being misled
APMs should never be presented with greater prominence than IFRS results.
Disclosure and Regulatory Requirements
Regulators recognise both the potential usefulness and the risks of APMs. While IFRS Standards do not directly regulate APMs, some jurisdictions (e.g., ESMA in Europe) require:
- Clear labelling, so users know which measures are non-IFRS
- Definition of each APM, including how it is calculated
- Reconciliation to the closest IFRS number
- Consistent calculation methods year-on-year, with an explanation of any changes
- Sufficient explanations to allow users to understand limitations
Exam Warning
In the exam, if APMs are presented without proper definitions, reconciliations, or are given greater prominence than IFRS figures, you must highlight this as a reporting risk and discuss potential impacts on users’ decisions.
Typical Examples of APMs
- EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation)
- Adjusted profit (profit excluding specific items)
- Core earnings or 'core' profit
- Free cash flow (operating cash flows minus capital expenditure)
- Net debt or net financial indebtedness
Each APM must be explained to users—there is no universally accepted calculation.
Worked Example 1.1
Scenario:
A group reports 'core profit' calculated as profit after tax excluding restructuring costs of $15m and an impairment charge of $10m. Both costs are material and not expected to recur next period.
Requirement:
Discuss how this APM should be presented to support investor understanding in accordance with good reporting practice.
Answer:
'Core profit' should be clearly labelled as a non-IFRS measure. A definition must be disclosed, explaining adjustments to statutory profit (removing $15m restructuring and $10m impairment). A reconciliation to profit after tax should be provided. An explanation for why management chose to adjust these items should be included. If these adjustments are subjective, disclosures should alert users to the limitations of comparability and reliability.
Worked Example 1.2
Scenario:
A company presents EBITDA in large type on the front page of its results announcement, with profit before tax and net profit shown in smaller print. The EBITDA figure is not reconciled to any IFRS-compliant figures.
Requirement:
Identify and explain any reporting issues.
Answer:
The company is giving greater prominence to an APM (EBITDA) than to statutory results, which risks misleading users. The lack of reconciliation to an IFRS measure reduces transparency. This presentation does not meet good disclosure practice and increases the risk that investors will focus on EBITDA without understanding the adjustments or differences from IFRS profit figures.
Investor Use of APMs
Investors expect companies to provide both statutory results and reasonable context for one-off items or extraordinary circumstances. Many investors use APMs to:
- Adjust for non-cash or non-recurring items in their own analyses
- Compare similar businesses more consistently across sectors
However, skilled investors also scrutinise the basis of APM calculation, disclosure quality, and trends in adjustments over time. APMs should never be viewed in isolation.
Revision Tip
In exam questions, show your ability to critically analyse APM presentation—consider both potential benefits and misrepresentation risks, and always reference the need for transparent reconciliation to IFRS figures.
Summary
Alternative performance measures, when presented transparently and with clear reconciliations to IFRS results, can add value for investors seeking to assess core performance. However, APMs hold substantial risks due to judgment, inconsistency, and potential user confusion. Best practice is to clearly define, reconcile, and explain every APM, ensuring statutory results retain primary importance.
Key Point Checklist
This article has covered the following key knowledge points:
- Define and identify common alternative performance measures (APMs)
- Explain intended benefits and key risks of APM use for investors
- Recognise regulatory and disclosure expectations for APMs
- Analyse practical examples of APM presentation issues
- Critically discuss the role and limitations of APMs in financial reporting
Key Terms and Concepts
- alternative performance measure (APM)
- earnings management
- disclosure