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Legal Flash: ESMA Guidelines on Alternative Performance Measures

The European Securities and Markets Authority (ESMA) has issued guidelines on Alternative Performance Measures (APMs) for issuers whose securities are listed on a regulated market in the European Economic Area. The guidelines set out a common approach towards the use of APMs, and aims to promote the usefulness and transparency of APMs included in prospectuses, financial reports and market disclosures, which qualify as regulated information. The guidelines apply to APMs disclosed in regulated information on or after 3 July 2016.

What is an APM?
An APM is a financial measure of historical or future financial performance, financial position, or cash flows other than a financial measure defined or specified in the applicable financial reporting framework. Examples of APMs most commonly used include EBIT (Earnings Before Interest & Tax), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), operating earnings, cash earnings, earnings before onetime charges, net debt, autonomous growth or similar terms denoting adjustments to line items of statements of comprehensive income, financial position or cash flow.

What’s not?
Measures such as revenue, profit or loss and earnings per share (and other measures defined or specified by the applicable financial reporting framework) are excluded from the guidelines. The guidelines are also not applicable to (i) physical or non-financial measures such as number of employees or subscribers, (ii) information on major shareholdings, acquisition or disposal of own shares and total number of voting rights, or (iii) information to explain the compliance with the terms of an agreement or legal requirement such as lending covenants or the basis of calculating the remuneration of board members.

Principles to follow when disclosing APMs
The guidelines prescribe that the listed entity should (inter alia):

  • define the APMs used and their components as well as the basis of calculation adopted, including details of any material hypotheses or assumptions used, and indicate whether the APMs or any of their components relate to the (expected) performance of the past or future reporting period
  • disclose the definitions of all APMs used, in a clear and readable way, with meaningful labels reflecting their content and basis of calculation in order to avoid conveying misleading messages to investors;
  • disclose reconciliation of the APMs to the most directly reconcilable line items, subtotal or total presented in the financial statements of the corresponding period, separately identifying and explaining the material reconciling items, and present the most directly reconcilable line item, subtotal or total in the financial statements relevant for that specific APM;
  • explain the use of the APMs in order to allow investors to understand their relevance and reliability, and more in particular, explain why an APM provides useful information regarding the financial position, cash flows or financial performance as well as the purposes for which the specific APM is used;
  • accompany APMs by comparatives for the corresponding previous periods (or in situations where APMs relate to forecasts or estimations, by comparatives in relation to the last historical information available) and present reconciliations for all comparatives presented;
  • ensure that the definition and calculation of an APM is consistent over time (and if the entity stops disclosing an APM, explain the reason why this APM no longer provides relevant information).

Disclosure principles set out in the guidelines may in principle be replaced by a direct reference to other documents previously published which contain these disclosures on APMs and are readily and easily accessible to investors.

Click here to read the entire ESMA Guidelines on APMs.

Compliments of Loyens & Loeff – a member of the EACCNY