FMA seeks feedback on use of irregular earnings measures

Financial Markets Authority chief executive Sean Hughes. Photo / NZH

The Financial Markets Authority is seeking submissions on the growing use of irregular earnings measures in preference to statutory profit.

The market watchdog has published a draft guidance note on the disclosure of non-Generally Accepted Accounting Principles (GAAP) financial information.

That is in response to the growing number of companies using underlying earnings measures to strip out the 'noise' of unrealised movements in fair value that have to be recognised under International Financial Reporting Standards.

"These measures can provide useful information to investors, but they also have the potential to be misleading if used to mask bad news," FMA head of compliance Elaine
Campbell said in a statement.

"It is important for both issuers and investors to have greater clarity on the use of non-GAAP financial information, which will contribute to increasing confidence in our markets."

The IFRS accounting standards became mandatory in 2007, requiring companies to recognise the market value of assets such as property and financial instruments in their financial statements, sparking disquiet among corporates who claimed they exaggerated the global downturn in 2008.

The watchdog wants to promote meaningful communication of financial information, reduce the chance of misleading results, and offer greater clarity on the disclosure of irregular measures.

The overriding message in the draft guidance is that alternative performance measures not be misleading and aren't used to remove or disguise bad news.

The FMA began talks with market participants in November, holding discussions with small groups of chief financial officers, independent directors and audit firms.

Submissions close on June 29, and a final guidance note will be issued by the end of August.