Friday 27th September 2013
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The Financial Markets Authority can see some signs of improvement in the way listed companies report their earnings with non-standard measures, but expects firms to do better.
The market watchdog completed its first review of non-Generally Accepted Accounting Principles (GAAP) disclosures after issuing guidance on the non-standard measures in September last year. Across 23 listed issuers reviewed, total GAAP profit reported was $2.34 billion, compared to $4.14 billion reported on the non-GAAP measures. Just six reported official GAAP profit higher than the non-standard measures.
"While improvements are noted, all aspects of the guidance note are still not being addressed," the FMA report said. "Issuers using non-GAAP profit information were not always presenting a balanced view of profit, often giving more prominence to non-GAAP profit information than GAAP profit."
International Financial Reporting Standards became mandatory in 2007, requiring companies to recognise the market value of assets such as property and financial instruments in their financial statements.
That sparked disquiet among corporates who claimed they exaggerated the global downturn in 2008, and last year the FMA consulted on and issued a guidance note on how issuers should best present their results.
The review, which covered communications in the December 2012 and March 2013 half and full year results, resulted in the market watchdog contacting two issuers who didn't comply with the guidelines in the note, both of whom agreed to improve their future disclosure.
The FMA said it found instances where companies reconciled the non-standard measure back to the official result, but hadn't included it in the market communication, heightening the risk investors wouldn't cross-reference the changes.
"FMA expects a reconciliation to be provided in each and every document where non-GAAP measures are disclosed," the review said. "We also remind issuers that when disclosing non-GAAP profit measures this should be reconciled to GAAP profit being net profit after tax."
The market watchdog also found instances where companies didn't explain how non-standard measures were used internally and why they are useful.
The FMA also questioned the use of adjusted earnings before interest, tax, depreciation and amortisation while still referring to the measure as EBITDA.
"Even where the EBITDA figure with its additional adjustments is explained and reconciled in the market communication, the use of an incorrect label can be misleading," the report said.
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