Presenting financial performance – is change on the horizon?

07 March 2014

This week, to talk about presenting financial performance, I'd like to introduce guest blogger Peter Hogarth, who is our UK Accounting Consulting Services leader.

By Peter Hogarth

Regulators and standard-setters have long grappled with the question of how entities should best present financial performance without misleading the reader. The answer in some jurisdictions has been to enforce a standard format for the income statement, with no additional sub-totals or analysis permitted anywhere on the face of statement itself. The approach in other countries has been rather more flexible. Many entities use columns, boxes, sub-totals and other approaches in an attempt to convey to the reader an impression of what ‘underlying’ or ‘sustainable’ earnings might be.

Supporters of either approach tend to be as passionate in their defence as they are critical of the opposing view. But why are we talking about it now? Well this topic has moved up the priority list for standard setters and regulators. The IASB Disclosure Initiative project has already started to look at some possible ways to address the issue under IFRS. And regulators continue to focus on how entities present their results, although they don’t always speak with one voice. In the UK, the Financial Reporting Council has stated that it "supports the inclusion of alternative performance measures when they provide users with additional useful, relevant information". In contrast, the Australian Financial Reporting Council has been clear that such measures belong outside the financial statements.

And it doesn’t end with standard setters and regulators. Others have been weighing in on the discussion. Standard & Poor’s recently issued a study highlighting that adjusted profit measures might give investors a misleading impression of performance. The International Federation of Accountants has just issued a consultation on the same topic.

But what do I think? The most important take away from the discussion is that the income statement is the best measure of performance. And I tend to agree with the statement by Hans Hoogersvoorst, IASB Chairman that “no single line can capture everything about a company’s performance that a user will need”. A PwC survey of the investment community in 2007 revealed that very few respondents would prohibit non-GAAP measures, but there was strong demand for some sort of ground rules and the IASB is probably best placed to provide those.

How they will do that is a challenge especially given the current diversity in practice by reporters and diversity in enforcement by regulators. The Disclosure Initiative project is the first step and I encourage the IASB to coordinate with the other initiative around integrated reporting and actively seek feedback to truly understand the needs of users.

What do you think?


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At present, we have guidance from some places that non-GAAP information should be "no more prominent" than the GAAP information. This has been stretched to, and beyond, its natural meaning. Other places, as you say, will not permit non-GAAP at all, yet this is an unduly harsh regulation, given that users support the information value that non-GAAP information brings.
So here's a proposal that all countries and regulators should be able to support: non-GAAP information is acceptable, in the financial statements and elsewhere, provided that it is demonstrably less prominent than the GAAP information presented. The onus would be on the reporting entity to demonstrate that its GAAP information is the more prominent.

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