The Financial Reporting Lab has published guidance for companies on ways to improve the presentation of performance metrics in their reporting following criticism from investors about a lack of clarity and transparency
Despite calls from the FRC to improve the quality of reporting on performance metrics, in many cases companies are addressing the expectations of the principles but are not reporting on this clearly.
The use of metrics needs to be clearly explained in the company disclosures and must take account of the overall business model, strategy and competitive advantage. At the same time, they need to demonstrate how the company creates long-term value and how the business uses metrics internally to make business decisions and to manage, monitor and incentivise the achievement of the business strategy.
The Lab report sets out the key principles of performance metrics reporting, focusing on how they should align to strategy, levels of transparency, context, reliability and consistency.
The guidance, Performance metrics – Principles and practice, includes checklists and detailed examples of how companies can apply the measures to their reporting to provide better disclosure.
In the case of non-GAAP metrics, it is important to explain why and how they more appropriately represent the business model and strategy. Where adjustments are made to exclude cost items, disclosures should reflect any related gains, and where specific adjustments have been made, provide some detail, at least at a material level.
Phil Fitz-Gerald, director of the Financial Reporting Lab, said: ‘The Lab’s report highlights the importance of presenting performance metrics that are aligned to strategy, transparent, in context, reliable and consistent. It provides practical guidance and examples of how this can be achieved and how reporting of performance metrics can better meet investors’ needs.’
Company managements and their boards should ask the following questions:
• do our metrics clearly link to our company’s strategy and value drivers? Have we addressed all relevant financial and wider metrics?
• are we reporting the metrics that are being monitored and managed internally?
• is there a clear link between the metrics that drive our business model and strategy, and remuneration policy?
FRC guidance, Performance metrics – Principles and practice, issued 8 November 2018
Report by Sara White