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FMA releases update on non-GAAP measures

NZN 28/03/2017 Jonathan Underhill

The Financial Markets Authority has proposed an update to its guidance for companies who use financial information that doesn't follow generally accepted international rules after a survey found three-quarters of them emphasised numbers that made profits look bigger.

The markets regulator has released an update to its 2012 guidelines on the use of non-GAAP financial information for feedback by April 7.

The new guideline repeats that while non-GAAP information can be useful in providing additional insight into a company's financial performance, condition, or cash flow "it has the potential to be misleading if inconsistently presented, inadequately defined, not reconciled to the most comparable GAAP financial information and/or used to obscure financial results determined in accordance with GAAP".

GAAP stands for generally accepted accounting practice, meaning globally accepted.

In New Zealand's case accepted practice is the NZ version of the International Financial Reporting Standards. The guidance is for companies caught by the Financial Markets Conduct Act, meaning they issue securities to the public.

Among the changes from the 2012 guidelines are that non-GAAP measures shouldn't be given greater prominence than comparable GAAP financial information and that one-time or non-recurring items should genuinely be one-offs and if they're used the company should capture every single such item to avoid "cherry-picking" on adjustments.

The FMA reviewed uptake of the 2012 guidelines in 2013, looking at 23 major listed companies which generated a total GAAP profit of $2.3 billion and a non-GAAP profit of $4.1 billion, an additional 76 per cent of profit.

It found that 17 of the 23 reported a non-GAAP profit greater than their GAAP profit.

One measure, in particular, raised the most concerns - ebitda or earnings before interest, tax, depreciation and amortisation - a metric so popular it's used by eight of the 10 companies on the NZX 10 Index. The other two use either ebit (earnings before interest and tax) or underlying earnings.

Some of the variations are so protracted they can barely be said in a single breath.

Such as Z Energy's "replacement cost operating earnings before interest, taxation, depreciation (including gains and (losses) on the sale of fixed assets), amortisation and fair value movements in interest rate derivatives and movements in decommissioning and restoration provision".

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