In June 2015 the European Securities and Markets Authority (“ESMA”) published guidelines on Alternative Performance Measures (“APMs”) (05/10/2015│ESMA/2015/1415en, the “Guidelines”). The Guidelines replace the previous CESR guidelines of October 2005 and apply to relevant disclosures made on or after 3 July 2016.
APMs can be useful to issuers and investors because they can provide additional insight into an issuer’s financial performance, financial position and/or cash flow. However, problems may arise when APMs are presented inconsistently, defined inadequately or obscure financial results determined in accordance with the applicable financial reporting framework. The express purposes of the Guidelines are therefore to promote the usefulness and transparency of APMs and to improve the comparability, reliability and/or comprehensibility of APMs. The Guidelines are addressed to, among others, issuers who publish APMs and who fall within the scope of the Transparency Directive, the Prospectus Directive and/or the Market Abuse Regulation.
An APM is defined as “a financial measure of historical or future financial performance, position or cash flows of an entity which is not a financial measure defined or specified in the applicable financial reporting framework applied by the entity”. Examples of APMs are financial measures of a company’s performance, its financial state of affairs and future expectations when such information has not been derived directly from the financial statements (drawn up in accordance with EU-adopted IFRS or local GAAP, such as revenue, profit or loss or earnings per share) such as net debt, earnings before interest, taxation, depreciation and amortisation (EBITDA) and other adjusted operating measures, free cash flows (FCF) and various measures of operating or financial gearing. APMs are typically found in management reports contained in annual or semi-annual reports, prospectuses, earnings releases and other ad hoc disclosures.
Issuers are under no obligation to disclose any APMs but when they do, they must make every effort to comply with each of the principles contained in the Guidelines, which can be summarised as follows:
• Disclosure principles: APMs, their components and the basis of calculation adopted, including details of any material hypotheses or assumptions used must be defined; it must also be indicated whether the APM or any of its components relate to the (expected) performance of the past or future reporting periods.
• Presentation: The definitions of all APMs used must be disclosed in a clear and readable way; APMs must be given meaningful labels.
• Reconciliations: A reconciliation must be disclosed of each APM to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period, separately identifying and explaining the material reconciling items; the most directly reconcilable line item, subtotal or total presented in the financial statements relevant for that specific APM must also be presented.
• Explanation of the use of APMs: the use of APMs, their relevance and reliability must be explained.
• Prominence and presentation of APMs: APMs must not be displayed with more prominence, emphasis or authority than the measures directly stemming from financial statements, and must not distract from the presentation of such measures.
• Comparatives: APMs must be accompanied by comparatives for the corresponding previous periods or, in situations where APMs relate to forecasts or estimations, by the last historical information available; reconciliations must be presented for all comparatives presented.
• Consistency: The definition and calculation of an APM must be consistent over time; redefinitions of APMs should be exceptional in which case the changes and the reasons why these changes result in reliable and more relevant information on the financial performance must be explained, and restated comparative figures must be provided. If an issuer stops disclosing an APM, the issuer must explain the reason for considering that this APM no longer provides relevant information7.
• Compliance by reference: Except in certain cases and for comparatives for the corresponding previous periods, disclosures required by the guidelines may be replaced by a direct reference to other documents previously published which contain these disclosures on APMs and are readily and easily accessible to users.
Notwithstanding the application of the Guidelines, investors and all other users of financial information will have to continue to exercise care when interpreting APMs to understand how the issuer is using them.
This publication is intended to provide information on recent legal developments and does not cover every aspect of the topics with which it deals. It was not designed to provide legal or other advice and it does not substitute for the consultation with legal counsel before any actual undertakings.