CLEAR Corporate Reporting

18 January, 2017

With Alternative Performance Measures coming under increased scrutiny, Fiona Hackett presents a CLEAR test that will assist in the preparation of annual reports.

Alternative Performance Measures (APMs) are a long-established means by which listed companies analyse and report on their performance in their various earnings releases and other communications with their investors. APMs are the non-GAAP / IFRS numbers that we read about in listed company press releases and hear discussed on the morning news bulletins after a listed company has announced its results.

APMs are deeply integrated in Irish and UK corporate reporting and, in recent years, have received an increasing amount of investor and regulator focus. This is attributable in part to concerns among users of annual reports that APMs are being used to flatter results, as suggested by IAASA in its October 2015 publication entitled, 'Observations on Selected Financial Reporting Issues Years Ending On or After 31 December 2015'.

The wider corporate reporting purpose and agenda, as part of the ‘front sections’ of annual reports, have also received increased attention in recent years (in areas such as gender diversity reporting, for example) from a broad range of financial statement users. Such users include accounting standard setters, politicians and investors. Not surprisingly, these factors have led to increased regulation and guidance with new European guidelines on APMs effective in July 2016, which apply to the financial information a listed company discusses outside its audited financial statements.


Part of the regulator response to the increased focus on APMs was the publication of Guidelines on Alternative Performance Measures by the European Securities and Markets Authority (ESMA) in October 2015. The guidelines apply to APMs disclosed in financial information published by entities with debt or equity admitted to trading on regulated issuers. The guidelines are applicable to APMs included in the ‘front half ’ of annual reports and interim financial reports of such issuers, but exclude financial information in audited financial statements.

The ESMA guidelines apply to APMs disclosed by issuers when they publish regulated information on or after 3 July 2016. Therefore, half-year reports for June are the first time we see regulated financial information published subject to the ESMA guidelines. Issuers that fall within the scope of the guidelines should now consider whether the APMs they plan to use in their half-yearly reports pass the CLEAR test.

Purpose of the guidelines

For the purpose of the ESMA guidelines, an APM is “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”. Examples of APMs include: cash earnings, adjusted earnings per share, underlying profit, free cash flow, net debt and return on capital employed.

ESMA identify the purpose of the guidelines as “promoting the usefulness and transparency of APMs included in prospectuses or regulated information”. ESMA believe “adherence to the guidelines will improve comparability, reliability and/or comprehensibility of APMs”.

The guidelines are directly relevant to issuers within their scope and are also directed at the regulators of such issuers. However, the guidelines also have a much broader relevance and target audience. All users of listed entity financial statements will benefit from understanding the ESMA guidelines as they increase the clarity of APM reporting by listed entities.

As with other areas of financial reporting and wider corporate reporting, we can expect the application of these guidelines by listed entities to have a knock-on impact on corporate reporting by non-listed entities.

Why use APMs?

APMs can enhance the relevance and understandability of financial information for users. IFRS is complicated and appropriate APMs can help to bridge some of the complexities of IFRS in explaining the results of a listed entity to the users of its financial statements.

Section 327(3) of Companies Act 2014 (and the equivalent legislation in the UK) requires the fair review of the business that is included in a company’s directors’ report to include “an analysis of financial key performance indicators (KPIs)”. Such KPIs will not always be GAAP / IFRS numbers and many entities employ a variety of APMs as KPIs to explain their results.

Surveys of investment professionals confirm that investors find APMs useful when they are used in a transparent way and balanced with the GAAP / IFRS measures. APMs therefore have a place and purpose in good corporate reporting. However, overuse of APMs – or indeed, misuse – can detract from the usefulness of an annual report and can confuse users.

The CLEAR test

Issuers in scope of the ESMA guidelines should ensure that any APMs they include in the ‘front half’ of their annual report and in their half-year report are CLEAR in order to comply with the guidelines. CLEAR use of APMs will help ensure that the GAAP / IFRS information is not obscured, there is increased transparency of information for users, and users are not confused by excessive use of APMs.

CLEAR APMs meet the following criteria:

  • Clearly and consistently defined and calculated, with comparatives presented;
  • Labels are meaningful;
  • Explained to users;
  • Appropriately balanced with GAAP or IFRS measures;
  • Reconciled to GAAP or IFRS measures and relevant to users.

Clearly and consistently defined and calculated, with comparatives presented

The basis on which an APM has been calculated, and the components of the APM, should be clearly defined in the annual report. The APMs used should be consistent year-on-year and should be calculated in a consistent manner. If an entity presents adjusted earnings per share as an APM calculated based on IFRS profit adjusted for exceptional items, for example, the adjustment for exceptional items should be clearly explained and calculated consistently each year regardless of whether the exceptional items in a given financial year result in an increase or decrease in adjusted earnings.

Where an APM is not defined or calculated in a consistent manner year-on-year, the ESMA guidelines require the issuer to explain the changes, the reasons for the changes and restate the comparative figures. Likewise, if an entity no longer reports an APM, it should explain why that APM no longer provides relevant information.

The ESMA guidelines also mean that an APM will not be reported in isolation in a given year because it portrays a particularly favourable result in respect of that financial year and not reported where the result is less favourable the following year.

Comparatives should be presented for all APMs. The clarity of APMs is enhanced by the inclusion of comparatives, allowing users to make direct comparisons to the prior financial year. If it is impractical to present APMs for the comparative period (due to the means by which a business combination completed in the current financial year was integrated into the entity, for example), that impracticality should be explained.

Labels are meaningful

APMs should be labelled in a way that reflects their content and doesn’t mislead users. A label of ‘adjusted profit’, for example, might not pass the CLEAR label test as it is not clear what measure of profit has been adjusted. Without further explanation, it is not clear what adjustments have been made. Without the ESMA guidelines, it would be a case of ‘users beware’ as adjusted profit in one entity will not necessarily be calculated in the same manner as that of another entity.

CLEAR and meaningful labels are readily understood by users, easily readable, and don’t use terminology that is overly technical.

Explained to users

The reasons for use of APMs and the relevance of individual APMs should be explained to users so that they understand their relevance and reliability. For example, an APM such as earnings before interest, taxes, depreciation and amortisation (EBITDA) might be explained to users as a key internal metric that is used by a company in its budgeting process or explained as a metric that is used as a performance condition in an employee bonus plan. An APM such as ‘net debt’ might be relevant to the entity’s compliance with its banking covenants. A CLEAR explanation will help users understand the importance of a particular APM.

Appropriately balanced with GAAP / IFRS measures

The ESMA guidelines state that APMs should not be displayed with more prominence, emphasis or authority than measures stemming directly from the financial statements. APMs shouldn’t be highlighted in bold text when the GAAP / IFRS measures are not.

It would not be appropriate, for example, to present in a financial highlights table ‘revenue including share of joint venture revenue ’in bold text using a large font when the IFRS revenue is presented with no bold emphasis in a smaller font.

The ESMA guidelines suggest that overemphasis of APMs distracts from the GAAP / IFRS results and financial position presented in the financial statements, and implies that the unaudited APMs have more authority than the audited GAAP / IFRS measures.

Likewise, use of an excessive number of APMs without an appropriate balance of GAAP / IFRS measures may not lead to CLEAR reporting as it can result in information overload for the user and lead to the information provided by the statutory financial statements becoming obscured.

Reconciled to GAAP / IFRS measures, and relevant to users

APMs should be reconciled to the comparable GAAP / IFRS measures in the financial statements. For example, EBITDA might be reconciled to an operating profit line item if presented in the income statement. The reconciliations should be CLEAR and easily understood. Each line item in the reconciliation should be identified and explained.

Table 1 (page 33) is an example of a reconciliation that would fail the CLEAR test. It would fail for three main reasons. Firstly, the largest reconciling item is described as ‘other adjustments’. This doesn’t give the user a proper picture of what is included in the ‘other adjustments’ line item. Second, the reconciliation has only been presented for 2015. Finally, the profit measure used as a starting point in the reconciliation is not clearly defined. A reconciliation that would pass the CLEAR test, on the other hand, would be similar to Table 2 (page 33).

Any APMs used should be relevant to the users of the annual report.They should also add value to users’ understanding of the annual report, as relevant APMs will enhance the explanation of the results and financial position of the entity. This will help users understand how the entity has performed in a financial year and ultimately enhance the user’s decision-making process.


ESMA is an independent EU authority and its responsibilities include the supervision of financial reporting regulators within the EU. The ESMA guidelines require regulators in each EU member state (IAASA and the Central Bank in Ireland, and the FRC in the UK) to incorporate the APM guidelines into their supervision of annual reports of listed entities and prospectuses issued by entities in the process of listing securities.

IAASA, together with its European counterparts, has long emphasised the need for transparent reporting of APMs. In its 2015 year-end observations document, IAASA stated that “the coming into force of the ESMA APM guidelines will give added impetus to IAASA’s activity in this area”.

Entities that fall within the scope of IAASA have therefore been warned that they can expect increased scrutiny and questioning from IAASA about whether their use of APMs is CLEAR.


The ESMA guidelines promote the status of APMs by regulating their use and presentation, and by making them subject to regulatory supervision. The guidelines are aimed at protecting the users of annual reports and achieving a level playing field in the use of APMs throughout the EU. Users of annual reports will also be able to make more direct comparisons of performance between companies that adhere to the guidelines.  

It is encouraging to see that a number of listed Irish companies have made positive strides in their APM reporting in the last 12 months and had regard to the guidelines in their December 2015 annual reports. It will be interesting to see how the use of APMs and application of the ESMA guidelines develops over the next few years.

If you are a preparer of annual reports containing APMs or a user of annual reports disclosing APMs, ask yourself: do the APMs pass the CLEAR test?

Contact us

Fiona Hackett

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5413

Johanna Dehaene

Corporate Communications, PwC Ireland (Republic of)

Tel: +353 1 792 6547

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