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Investors Require Improvements In Reporting Of Alternative Performance Measures

Mar. 06, 2018 2:12 PM ET

By Vincent Papa, PhD, CPA, FSA, CFA

The prevalence of alternative performance measures (APMs) - coupled with their often inconsistent, difficult to compare, unreliable, and not fully transparent reporting - has seen accounting professionals, auditing standard setters, regulators, investors, and other financial-reporting stakeholders continue to grapple with figuring out the best way of ensuring that APMs are truly useful and not misleading to investors. In the last two years, regulators across the globe (US SEC, International Organization of Securities Commissions, European Securities and Markets Authority) have either issued or updated their guidance and principles for the reporting of NGFMs. Although the regulatory guidance is a positive step, it remains to be seen whether it will significantly improve the clarity, transparency, and reliability of APMs on a sustained basis. CFA Institute recently conducted a member survey to ascertain the best way forward on the contentious topic of alternative performance measures (CFA Member Survey Report: Investor Expectations: The Way Forward on APMs). Alternative performance measures include non-GAAP financial measures (NGFMs) that are reported within and outside the primary financial statements (e.g., earnings before interest, tax, depreciation, and amortization; adjusted net income) as well as financial and nonfinancial key performance indicators that are reported outside the primary financial statements (e.g., same-store/like-for-like sales).

That being said, with a few exceptions (e.g., Nareit definition of funds from operations), neither voluntary nor mandatory guidance is available that would standardize the definitions of APMs and enable a meaningful comparability of APMs across similar business models.

The absence of standardized APMs is seen by some investors as a glaring gap that needs to be addressed. Furthermore, some investors assume that standardized definitions would increase the level of assurance on and reliability of APMs, particularly if the APMs were located within the financial statements. Many other investors, however, are comfortable with the view and communication

This article was written by

The Standards and Financial Market Integrity division of CFA Institute is a policy authority on ethics in the global capital markets. We advocate for fair and transparent markets for all investors.

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