Getting to grips with new guidelines on alternative performance measures

Getting to grips with new guidelines on alternative performance measures
Darius Lewington, solicitor in the Lexis®PSL Corporate team, looks at what lawyers need to know about the final guidelines on the principles that listed issuers should follow when presenting alternative performance measures (APMs) in documents that qualify as regulated information.

Original news

APM guidelines aim to provide performance transparency, LNB News 30/06/2015 128

Final guidelines on APMs for listed issuers aim to encourage EU issuers to publish transparent, unbiased and comparable information on their financial performance. The guidelines have been published by the European Securities and Markets Association (ESMA) in order to give users a comprehensive understanding of the performance of APMs. The guidelines are aimed at promoting the usefulness and transparency of APMs included in prospectuses or regulated information. ESMA considers that a common approach to APMs is necessary to ensure consistent, efficient and effective supervisory practices and a uniform and consistent application of the TransparencyDirective 2004/109/EC (TD) and by extension the Market Abuse Directive 2003/6/EC (MAD).The guidelines will apply from 3 July 2016.

What is the background to the guidelines?

In February 2014, ESMA issued its consultation paper on guidelines on APMs to replace the Recommendation on APMs issued in 2005 by the Committee of European Securities Regulators (ESMA's predecessor body) to tackle concerns about APMs used by issuers. ESMA believed that some APMs were being used in a way that presented a confusing or optimistic view of their performance by removing certain negative aspects, or where that was not the case, APMs could have been misleading if they were inconsistently calculated or presented.

Which entities do the guidelines apply to?

The guidelines apply to:

  • issuers (other than States), whose securities are admitted to trading on a regulated market and who are required to publish regulated information as defined by the TD, and
  • persons responsible for the prospectus under the Prospectus Directive 2003/71/EC, art 6 (PD)

The guidelines will be supervised by competent authorities and other authorities in the EU with responsibilities under the TD, the Market Abuse Regulation (EC) 596/2014 (MAR) or the PD. In the UK, the competent authority for these purposes is the Financial Conduct Authority.

What is an APM?

ESMA defines an APM as being a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the applicable financial reporting framework. APMs are usually derived from (or based on) 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.

Examples of APMs most commonly used include EBIT (Earnings Before Interest & Tax), EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation), free cash flow, and underlying profit or net-debt.

The guidelines do not apply to:

  • measures defined or specified by the applicable financial reporting framework such as revenue, profit or loss or earnings per share
  • physical or non-financial measures such as number of employees, number of subscribers, sales per square meter (when sales figures are extracted directly from financial statements) or social and environmental measures such as greenhouse gases emissions, breakdown of workforce by type of contract or by geographic location
  • information on major shareholdings, acquisition or disposal of own shares and total number of voting rights, or
  • information to explain the compliance with the terms of an agreement or legislative requirement such as lending covenants or the basis of calculating the director or executive remuneration

In what situations will the guidelines apply?

The guidelines apply in relation to APMs disclosed by issuers or persons responsible for the prospectus when publishing regulated information and prospectuses (and supplements).

Regulated information is all information which an issuer, or any other person who has applied for the admission of financial instruments to trading on a regulated market without the issuer's consent, is required to disclose under:

  • TD
  • MAD, art 6 or
  • the Listing Rules and Disclosure Rules and Transparency Rules

Examples of regulated information are management reports disclosed to the market in accordance with the TD and ad hoc market disclosures of inside information in accordance with MAD, art 6.

However, the guidelines do not apply to APMs:

  • disclosed in financial statements prepared in accordance with the applicable financial reporting framework and disclosed in accordance with the TD or the PD
  • disclosed in accordance with applicable legislation, other than the applicable financial reporting framework, that sets out specific requirements governing the determination of such measures—therefore, the guidelines do not apply to measures included in prospectuses such as pro forma financial information, related party transactions, profit forecasts, profit estimates, working capital statements and capitalisation and indebtedness for which the specific requirements of the prospectus regime apply

What status do the guidelines have?

The guidelines sit alongside the existing regulatory framework for financial reporting and disclosure of inside information. Competent authorities and issuers or persons responsible for the prospectus must make every effort to comply with guidelines.

What are the key principles under the guidelines?

The key principles under the guidelines include:

  • definitions of all APMs used should be disclosed in a clear and readable way
  • the components of APMs as well as the basis of calculation adopted should also be defined, including details of any material hypotheses or assumptions used
  • APMs disclosed should be given meaningful labels reflecting their content and basis of calculation in order to avoid conveying misleading messages to users
  • a reconciliation of the APM to the most directly reconcilable line item, subtotal or total presented in the financial statements of the corresponding period should be disclosed, separately identifying and explaining the material reconciling items
  • issuers or persons responsible for the prospectus should explain the use of APMs in order to allow users to understand their relevance and reliability
  • APMs should be accompanied by comparatives for the corresponding previous periods. In situations where APMs relate to forecasts or estimations, the comparatives should be in relation to the last historical information available
  • issuers or persons responsible for the prospectus should present reconciliations for all comparatives presented
  • the definition and calculation of an APM should be consistent over time

When will the guidelines become effective?

In order to enable sufficient time for issuers to prepare for applying the guidelines, and to align their application with the entry into force of the new MAR, the guidelines are effective from 3 July 2016.


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About the author:
Jenisa is Head of Market Insights for Lexis®PSL, with responsibility for the delivery of Market Tracker, a transaction analysis product that sits within Lexis®PSL Corporate. She has over 15 years of legal publishing experience, with a focus on researching and reporting on trends and developments in the corporate and commercial legal market. Previous roles include content developer for Lexis®PSL, Legal Podcaster at Informa, and Research Editor at Practical Law Company where she specialised in reporting on cross-border corporate and commercial developments from the firm’s New York office.