Alternative Performance Measures by ESMA
A consultation on the Guidelines on substitute performance has been launched by ESMA; the European Securities and Markets Authority. The guideline’s objective is in improving transparency and the comparison of information in finance, information asymmetry reduction among the financial statement users.
Even if the financial statements and other financial related information are presented as per the framework of the applicable financial reporting that can result in reliable and relevant information, there is the users demand or issuers demand for any other information which is meant to lead to an improved understanding of an organization’s performance and position. This is in most times included in the financial statements or the documents that go along with the financial statements and usually entails information that is re-calculated, that already provided or new systems designed for the improvement of that information’s understanding.
To help the users in making proper investment decisions, ESMA recognizes the APM’s significance. The major proposed guidelines requirements were:
a) Those issuers define the APM used together with its components and a basis of that calculation that is adopted.
b) Meaningful labels which reflect the basis of calculation and methodology so that they don’t give information that is not correct.
c) That all the used APMs to be disclosed and there be a definition in an appendix for publication.
d) A reconciliation done to the latest financial statements presented and a separate identification and explanation of every item of reconciliation.
e) The context of every APM need to be disclosed in order that users may gain an understanding of the concerned APM information.
f) Those APMs which are presented beyond the financial statements need to be displayed less dominantly
g) Comparatives for corresponding previous financial periods need to be provided when an issuer chooses to have APMs presented.
h) There should be consistency in the calculation and APM definition. Incase that is not followed, an issuer needs to give an explanation as to the change of definition or calculation of an APM.
i) Incase an APM is discontinued, the issuer requires to make an explanation of its removal and the reasons as to why any APM that is newly defined which is replacing the new one offers more relevant and reliable information on financial performance unlike in previous terms.