16/12/2016

FRC announces 2017 thematic review of alternative performance measures

BY Eleanor Leach

The Financial Reporting Council (FRC) has announced that in 2017 it will conduct a thematic review with the aim of seeking continuous improvements in corporate reporting and sharing with others, examples of best practice. These reviews will be carried out in both corporate reports and audits.

The review will focus on significant accounting judgments and sources of estimation uncertainty, pension disclosures and a further analysis of the use of alternative performance measures. The FRC has already issued a report on the implementation of the recent European Securities and Markets Authority (ESMA) Guidelines (the Guidelines), but this second review will look to focus on those matters that caused concern in the first APM review.

It will specifically look at the extent to which company reports are consistent with the Guidelines, and use this information to question whether the report has satisfied the requirement to be fair, balanced and understandable.

The FRC will consider the following areas, from the Guidelines, when probing where specific improvements can be made:

  • The explanation of APMs, why they are used and by whom
  • The importance of the APM in relation to company performance
  • Assessment of whether APMs are given greater emphasis in the annual report
  • Definitions of all APMs along with individual reconciliations
  • Explanations of changes in APMS year-to-year
  • Companies should carefully consider the items that are excluded from adjusted measures, particularly in using the term ‘one-off’ for items that are frequently removed

In its communication the FRC has stressed that it will look at consistency in how companies report exceptional items, which will also have a bearing on APMs.

In the same statement, the FRC has announced its priority sectors for the year; property, travel and leisure, and support services. These companies will be of focus throughout this review, and will form the foundations for the ‘Annual Review of Corporate Reporting’.

Ultimately, this is a communication issue. Companies need to be more overt in their disclosures and ensure that they are increasing their transparency especially when reporting alternative performance measures. To see how FTSE 350 companies are currently using APMs please download our latest white paper, ‘Reporting alternative performance measures: are we on track?