What to consider when reporting underlying profit

Wednesday, 01 January 2020

Profit that is reported other than in accordance with International Financial Reporting Standards (IFRS) in annual reports, profit announcements or other company reporting is called non-IFRS profit. Non-IFRS profit can be described in a number of ways and the most commonly used is underlying profit/earnings.

Other terms include non-statutory profit, alternative earning, alternative performance measures, cash earnings/basis (commonly used in banks), non-GAAP earnings, earnings before interest and tax (EBIT) and earnings before interest, tax, depreciation and amortisation (EBITDA). Some not-forprofit entities might disclose a surplus from operational activities as an alternative performance measure.

The Australian Securities and Investments Commission (ASIC) defines non-IFRS financial information as ‘financial information that is presented other than in accordance with all relevant accounting standards’ and provides reporting guidance through its Regulatory Guide 230 Disclosing non-IFRS financial information (RG230)1 . There are other guides that have also been issued by regulators around the world. Despite this, many companies choose not to adopt this guidance, prompting media and consultants alike to question the source of the information and its applicability. This level of scrutiny is symptomatic of the five year low in business trust announced in the 2018 Edelman Trust Barometer. 

Boards and audit committees have an important responsibility on behalf of company shareholders to oversee the financial reporting process. They act as a bridge between management and investors to evaluate the sufficiency of related disclosures in order to ensure that such disclosure is not misleading. In order to fulfil this core duty, and improve trust and confidence in business in the current climate, boards and audit committees should take a renewed look at their company’s presentation of non-IFRS profit measures.

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