Most executive incentive plans reference non-AASB defined measures. This has not been a major issue given there is an exemption for disclosing these for executive and director remuneration purposes (see ASIC Regulatory Guide 230 HERE) .
But future variations from AASB standards may need less explanation. Recently the International Accounting Standards Board (IASB) published an exposure draft with the objective to improve how information is communicated in the financial statements.
IASB proposes that companies:
- present new defined subtotals in the statement of profit and loss;
- disaggregate information in a better way; and
- disclose information about some performance measures defined by management.
In addition to reporting statutory earnings required by accounting standards, many companies also provide profit measures defined by management in communications with investors. Measures such as “underlying profit” or “core earnings”, often referred to as “non-GAAP” measures, can be useful because they provide insight into how management views the company’s financial performance, how a company is managed and the persistence of its financial performance. Analysts also frequently forecast a measure of profit that is different from the statutory figure.
Performance metrics in incentive plans are also often based on some measure of underlying profit that is not easy for investors to reconcile with statutory figures.
However, investors have expressed concerns about the quality of disclosures provided about such management-defined measures. For example, the disclosures do not always clearly explain:
- how the measures are calculated;
- why the measures provide management’s view of the company’s performance;
- how the measures can be reconciled to subtotals specified by accounting standards; or
- the effect on tax and non-controlling interests of the adjustments made in calculating the measure, which are used by investors to calculate adjusted earnings per share measures.
IASB acknowledges investors’ concern that performance measures defined by management can provide useful information but should be used in a more transparent and disciplined way.
The proposal could help making some incentive measures more transparent to investors, but as it does not require companies to disclose their assessed cost of capital, shareholders will still have to judge economic profit or economic value added (EVA) themselves.
For Australian companies, ASIC’s RG 230 Disclosing non-IFRS financial information provides guidance to directors and preparers of financial reports on the use of financial information presented other than in accordance with accounting standards. The AASB will work with ASIC to determine how these proposals and RG 230 would interact going forward.
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