An alternative performance measure (APM) is a measure of financial performance, position or cash flows that is not defined in the applicable reporting framework. Management teams often use APMs to supplement mandatory disclosures, adjusting for items they believe do not reflect the core operations of the business. While these measures can be useful, they are not always explained clearly enough for users to understand their context or purpose.

To address concerns about the use of APMs, IFRS 18 introduces mandatory disclosures for management-defined performance measures, or MPMs, in financial statements.

What are management-defined performance measures (MPMs)?

MPMs are a sub-total of income and expenses that:

• Are used in public communications outside financial statements.
• Communicate management’s view of an aspect of the financial performance of the entity as a whole.
• Is not specifically required to be presented or disclosed by IFRS, or one of the specific, commonly understood subtotals excluded by the standard.

Common examples of MPMs include adjusted profit or loss, adjusted operating profit, EBITDA or adjusted EBITDA. Performance measures that fall outside the definition of MPMs include:

• Non-financial performance measures such as carbon emissions, occupancy rate, employee satisfaction or customer satisfaction.
• Financial performance measures that are not income/expense subtotals such as free cash flow, return on equity or net debt’s.
• Financial performance measures that are IFRS defined subtotals of income and expenditure like operating profit before depreciation, amortisation and impairment within the scope of IAS 36.

MPM disclosure requirements under IFRS 18

There are several required disclosures to help users understand MPMs and how they compare with IFRS-defined performance measure.  For audited entities, disclosed MPMs will fall within the scope of the statutory audit.

Each MPM must be clearly labelled and described, with the following disclosures included in a single note:

• A clear explanation of the aspect of financial performance that the MPM represents, including the reason that management considers the MPM enhances users’ understanding of financial performance.
• Details of how the MPM is calculated.
• A reconciliation showing how the MPM links to the closest relevant IFRS subtotal with each related line item in the financial performance statement identified.
• The effects of income tax and non-controlling interests on each reconciling item.
• An explanation of how each reconciling item and its associated income tax effect was determined.

Any changes to MPMs, such as new or discontinued measures, or changes to the method of calculation, must be explained and justified, with comparative information restated.

Example MPM reconciliation

What about additional earnings per share (EPS) measures?

Entities may, in addition to the required basic and diluted EPS figures, include supplemental EPS calculations in the notes, provided these are based on a component of the statement of comprehensive income.

There is a minor amendment to IAS 33, with additional EPS disclosures only permitted if the numerator represents a total or subtotal specified by IFRS 18, or if it is an MPM.

What should your business do to prepare for IFRS 18?

Early preparation is key to get your business ready for IFRS 18. To ensure a smooth transition, consider the following steps:

• Review any communication of performance metrics outside the financial statements and assess whether they might be MPMs under IFRS 18.
• Familiarise yourself with the disclosure requirements including reconciliations to the nearest IFRS-required subtotal, along with tax and non-controlling interest effects.
• Set up a governance process to mitigate the risk of inadvertently creating an MPM when communicating performance.
• Review KPIs to confirm they remain relevant under the revised profit and loss structure, and ensure the business can comply with the MPM disclosure rules.

Helping you navigate IFRS 18

Our accounting and financial reporting experts are ready to support your business with the changes. Please get in touch with Lou Ward or your usual RSM contact.

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