The FMA's guidance note continues to recognise that non-GAAP financial information (also called alternative performance measures) can be useful for market participants, providing greater insights into an issuer's financial performance.
This is consistent with the results from the External Reporting Board's recent survey, in which 88% of respondents found alternative performance measures useful when assessing an issuer's performance, given the inherent limitations of GAAP financial information.
What does the guidance apply to?
This guidance applies to any non-GAAP financial information presented by issuers outside of their financial statements.
Issuers should be mindful of this guidance when preparing market announcements, investor presentations and other communications to shareholders and market participants.
The FMA has removed commentary on whether or not the definition of non-GAAP information captures all information disclosed outside of the financial statements from the guidance note. Instead, the FMA now clarifies the scope of the guidance in its Q&A, saying that, among other things, its guidance does not apply to non-financial information, such as the numbers of employees or subscribers disclosed by an issuer.
Key changes in the revised guidance
Key changes from the FMA's guidance note published in 2012, are:
- Non-GAAP financial information should not be presented with "undue and greater prominence" than comparable GAAP financial information.
- Previously, the FMA's guidance focused only on whether or not non-GAAP information was given "undue" prominence. The change to restrict non-GAAP financial information being given "greater" prominence brings the guidance into line with other jurisdictions. However, disappointingly the FMA did not reflect Chapman Tripp's submission that the reference to "and undue" should be removed as that element is out of line with the corresponding requirements in other jurisdictions and suggests greater prominence may be given to non-GAAP measures than GAAP measures so long as that greater prominence is not "undue". As a practical example of this change, issuers should not include in the headline to a results announcement or presentation a non-GAAP figure alone. Instead, the FMA has indicated through its Q&A on the guidance that, as an example, including both the GAAP and the non-GAAP profit measure in the headline of an announcement would be acceptable. There are several other examples of both acceptable and unacceptable conduct provided in the FMA's Q&A on the guidance.
- Reconciliations no longer need to be provided in every document with non-GAAP financial information. Issuers can now provide a reference to where the reconciliations may be accessed. We were pleased to see this change made by the FMA, but had hoped that the FMA would expressly extend this to the presentation of pro forma financial information too, given that including full reconciliations in every document is not user-friendly or practical. Practically for issuers, this means they will simply be able to include a link in any announcement or investor presentation to their website where an explanation of the non-GAAP measures used and the reconciliations to GAAP financial information can be maintained.
Rather than present non-GAAP measures outside financial statements, issuers also have an option to include in their financial statements additional sub-totals, line item disclosures or additional notes not prescribed by GAAP.
Increasingly issuers are doing so, to better explain financial information to their investors. Financial information requirements under regulations applying to equity Product Disclosure Statements also prescribe additional line item disclosure for EBITDA, a non-GAAP measure, and permit inclusion of additional line items that will be of use to investors (rather than because they are required by GAAP).
We think both are good developments.
Additional insights into financial performance and position can be gleaned from the key audit matter disclosure now required to be included in audit reports for NZX listed issuers.
Chapman Tripp looks forward to observing how issuers incorporate the FMA's updated guidance on the presentation of non-GAAP financial information in the future, and future investor surveys on the usefulness of financial information and key audit matter disclosure.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.