Introduction
ESMA's Guidelines on Alternative Performance Measures (APMs) (05/10/2015| ESMA/2015/1415), published on 5 October 2015 have recently come into force. The guidelines apply to all APMs appearing in prospectuses or regulated information published on or after 3 July 2016.
What is an APM?
An APM is any financial measure of historical or future financial performance, financial position, or cash flows which is not defined or specified in the "applicable financial reporting framework".
APMs are usually derived from the financial statements prepared in accordance with the applicable financial reporting framework, most of the time by adding or subtracting amounts from the figures presented in financial statements. Common examples of APMs include: earnings before interest, taxes, depreciation and amortisation (EBITDA), operating earnings, net debt and other specific measures and ratios such as supplementary capital and leverage ratios, foreign exchange adjusted earnings and other bespoke calculations.
APMs do not include such things as:
- measures defined or specified by the applicable financial reporting framework such as revenue, profit or loss;
- physical or non-financial measures such as number of employees; or
- information to explain the compliance with the terms of an agreement or legislative requirement such as lending covenants or the basis of calculating executive remuneration.
What is the applicable financial reporting framework?
For an issuer which prepares its financial statements in accordance with International Financial Reporting Standards as adopted in the EU (EU IFRS), the applicable financial reporting framework would be EU IFRS. For an issuer which is incorporated in an EEA member state but is not required to prepare its financial statements in accordance with EU IFRS, the applicable financial reporting framework would be the requirements of the national law of the member state in which the issuer is incorporated. For an issuer which is not incorporated in an EEA member state and which prepares its financial statements in accordance with accounting principles deemed by the European Commission to be equivalent to EU IFRS (such as US GAAP), the applicable financial reporting framework would be such equivalent accounting principles.
What is the status of the guidelines?
The guidelines are addressed to:
- issuers and other persons responsible for the contents of:
o prospectuses which need to be approved under the Prospectus Directive (2003/71/EC); and
o regulated information which needs to be published under the Transparency Directive (2004/109/EC) or the Market Abuse Regulation (596/2014); and
- the competent authorities in each member state which are the competent authorities for the purposes of those Directives and that Regulation.
Their purpose is to promote the usefulness and transparency of APMs included in prospectuses or regulated information by improving the comparability, reliability and/or comprehensibility of APMs.
What do the guidelines require?
The principal requirements can be summarised as follows:
• Each APM used should be defined in a clear and readable way and given a meaningful label reflecting its content and basis of calculation in order to avoid conveying misleading messages.
- Each APM used should be reconciled to the most directly relevant line item, subtotal or total presented in the financial statements of the corresponding period with an explanation of the material reconciling items.
- The use of each APM should be explained in order to facilitate understanding of its relevance and reliability.
- Each APM used should be accompanied by comparatives (with corresponding reconciliations) for the corresponding previous periods, or where it relates to a forecast or estimate, the comparatives should relate to the last historical information available.
- The use of an APM should be consistent over time or, if this is not appropriate, an explanation of the relevant changes should be included together with restated comparative figures (unless the use of the APM is simply discontinued).
Practical Steps
An issuer, or anyone else responsible for a prospectus or any regulated information, will need to identify any APMs appearing in any prospectus or any regulated information which it intends to publish and decide upon a clear and comprehensible way of complying with the guidelines. Depending upon the nature and number of any APMs used it may be most appropriate to do this in the text in which the APM is used or in a schedule to the relevant disclosure. Any information necessary to demonstrate compliance with the guidelines would most likely best be prepared by the person responsible for creating and calculating the relevant APM.
In addition, when submitting a prospectus or regulated information to a competent authority, the issuer or other person responsible should be prepared:
- to confirm to the competent authority that either :
o the prospectus or regulated information (including its information incorporated by reference) does not contain any APMs; or
o the prospectus or regulated information (including its information incorporated by reference) complies with the guidelines; or
- to revise the relevant disclosure accordingly.
