AFM review indicates lack of transparency in use of alternative performance measures by Dutch issuers

The term APM refers to any sort of financial measure that is not defined or specified in the applicable financial reporting framework of an issuer, such as IFRS. APMs are commonly used by issuers in their annual and semi-annual reports, press releases or prospectuses and include examples such as 'EBITDA' and 'Organic Growth'. 

The European Securities and Markets Authority (ESMA) has issued Guidelines for Alternative Performance Measures on the use of APMs. The objective of these Guidelines is to promote the usefulness and transparency of APMs included in prospectuses or regulated information and to contribute to the comparability, reliability and comprehensibility of APMs. 

In summary the ESMA guidelines provide the following: 

1. APMs should not be displayed with more prominence, emphasis or authority than IFRS measures. 
2. A reconciliation of each APM should be included to its most directly reconcilable IFRS line item. 
3. Each APM should be defined and should be given a meaningful label that reflects its content and basis of calculation. 
4. Comparative information should be included for corresponding previous periods. 
5. APMs must be accompanied by an explanation of their use describing their relevance and reliability. 
6. The definition and calculation of an APM must remain consistent over time. 

AFM review

During its regular supervision of annual reports and prospectuses, the AFM noticed an increase in the use of APMs in regulated information. This increase, combined with faulty or missing calculations and explanations of the APMs used, led the AFM to conclude that some corporate communications read more like an analysis based on a company's home-grown accounting framework, rather than regular IFRS standards.

As a result, the AFM initiated a thematic review on the use of APMs in semi-annual board reports and related press releases of 32 Dutch issuers. The AFM concludes that the disclosure of APMs often falls short of the required level of transparency and that the ESMA Guidelines for Alternative Performance Measures are often not complied with.

AFM findings

The AFM concludes the following:

1. Issuers frequently fail to comply with the requirement that APMs should not be presented with more prominence than IFRS measures. Some issuers use a significant number of APMs, which results in a higher risk of displaying APMs in a more prominent manner than IFRS measures. Other factors of prominence include examples of issuers that focus exclusively on APMs in the first pages of their semi-annual board reports or place more emphasis on APMs by featuring them in the headers of their press release. 
2. The required reconciliations of APMs to the nearest IFRS line item are often absent or insufficiently detailed. 
3. APMs are often either unclearly defined or not defined at all. APMs are occasionally labelled in a way that allows for misinterpretation. For example, an APM may be labelled as EBITDA, despite being adjusted for various effects, making Adjusted EBITDA a more appropriate definition. Another example highlighted by the AFM is the term ’Organic Growth’, which is commonly used, but often not clearly defined. This can be problematic, according to the AFM, as readers will often have a preconceived idea of how organic growth is determined, which is not necessarily aligned with how a specific issuer calculates organic growth. 
4. APMs are not always accompanied by comparative numbers for corresponding previous periods. 19 of the 32 reviewed semi-annual board reports failed to include comparative numbers for APMs, which raises concerns about transparency and reliability. 
5. Explanations provided for the use of APMs are often generic and do not offer guidance for each individual APM. Instead of providing specific explanations for each APM, boilerplate explanations such as 'the APMs can be used to gain a better insight into the results, cash flows, or solvability' were frequently included. 
6. Many of the semi-annual board reports covered in the AFM's review provided insufficiently transparent definitions, comparatives or reconciliations. This makes it difficult to assess whether APM disclosure is consistent throughout reporting periods. 

Recommendations AFM

The AFM urges issuers to review their compliance with the ESMA Guidelines and the transparency of their financial reporting. Furthermore, the AFM provides some useful examples of what they consider to be good practice: 

1. Incorporate a dedicated section featuring a clearly labelled table containing (i) reconciliations; and (ii) comparative numbers for each APM used, in particular when using a large number of APMs. 
2. Consistently use footnotes to indicate the use of an APM and direct readers to the relevant paragraph for further information on the APM. Helpful in this respect could be referring to another document, such as the annual report, where more comprehensive information on the APMs is available. 
3. Provide an explanation on the use of each APM, detailing how management uses the measure, and guiding readers how to interpret the figures. This explanation should ideally remind the readers that APMs may not be comparable to similar measures reported on by other companies, particularly for common measures such as free cash flow or EBITDA. 
4. When using Organic Growth, clarify what has affected the APM to what extent; for example, quantify the impacts of M&A activity or currency effect on the company's growth. 

Conclusion

APMs are and will continue to be a key focus of the AFM in its supervision of press releases, financial reports and prospectuses. Following its thematic review, the AFM issued a letter to 17 Dutch issuers under their supervision, detailing company-specific findings. 

We anticipate that the AFM will continue to engage with issuers upon identifying any transparency issues or shortcomings with respect to their disclosure of APMs. Dutch issuers would be well-advised to pay extra attention to their disclosure of APMs in the coming reporting periods to ensure compliance with the ESMA Guidelines and the AFM's expectations with respect to the use of APMs.