Consultation Paper ESMA Guidelines on Alternative Performance Measures

Tel +44 (0)20 7694 8871 8 Salisbury Square Fax +44 (0)20 7694 8429 London EC4Y 8BB mark.vaessen@kpmgifrg.com david.littleford@kpmg.co.uk United Kingdom Mr Steven Maijoor Chairman European Securities and Markets Authority 103 Rue de Grenelle 75007 Paris France Our ref Contact MV/288 Mark Vaessen, David Littleford Dear Mr Maijoor Consultation Paper ESMA Guidelines on Alternative Performance Measures We appreciate the opportunity to comment on the Consultation Paper ESMA Guidelines on Alternative Performance Measures, published in February 2014. We have consulted with, and this letter represents the views of, the KPMG network. We support the efforts of ESMA to enhance the principles introduced by CESR in its 2005 Recommendation regarding alternative performance measures (APMs). GAAP information is increasingly only one component of the information that issuers communicate about the performance, position and cash flows of an issuer. Both national and international initiatives, such as Integrated Reporting, are highlighting that communication between issuers and investors can be improved when corporate reporting is not based solely on GAAP information. We believe that these important and innovative developments in corporate reporting should be encouraged and supported, including their integration into the key media of annual reports, financial statements and related documents. However, as best practice develops, it is important that we encourage more transparent disclosure of APMs, including appropriate explanations and reconciliations of such measures (where possible to GAAP information). Only then can shareholders obtain the maximum possible benefit from the enhanced communication that quality corporate reporting offers. We believe that transparent disclosure of APMs will enable adequate comparability both interperiod and between issuers, even absent generally accepted definitions; though we would support the development of appropriate definitions of commonly used APMs, perhaps by industry bodies. We encourage ESMA to consider whether the final guidelines should put more emphasis on an overall principle, for example that APMs should be used to enhance users understanding of the, a UK company limited by guarantee, is a member of Registered in England No 5253019 KPMG International Cooperative, a Swiss issuer. Registered office: 8 Salisbury Square, London, EC4Y 8BB

information (see paragraph 4 of Annex III), and not to mislead users or obscure relevant information. (see our response to Question 13) With sufficient transparency, we do not believe it is in users interests to unduly constrain management s presentation of valuable issuer-specific key performance indicators (KPIs), that are included alongside GAAP numbers within the financial statements themselves (see our response to Question 2). We acknowledge that care will be needed to identify those responsible for APMs (both management and those charged with governance) and to clarify whether or not APMs are audited or subject to any other level of assurance. It is important that users understand that APMs presented alongside GAAP information in the financial statements are not always audited and therefore that they are labelled appropriately. However, we consider that these issues are solvable. (see our response to Question 13) We are concerned that the guidelines are ambiguous as to the documents in scope (e.g. press releases) and may hinder consistent implementation. We suggest that it be simplified to apply to any form of communication to the public that includes APMs. This simplification will ensure that when APMs are published, users have access to appropriate explanations and reconciliations. It also reinforces the principle of consistency across all issuers communications to the public. Taken together with the ability to cross-refer to another document (for example published on the entity s website) the intended transparency should be practical, even for APMs that are included in shorter documents (paragraph 8 of Annex III). (see our response to Question 2) In respect of prominence of APMs, we suggest that the guidelines should be broadened to allow a presentation with equal or less prominence. We believe that a presentation with less prominence only (as currently proposed) would require subjective evaluation by issuers and may be difficult to enforce by regulators. Less prominence may also be impracticable where there is no relevant GAAP measure (as is the case with some non-financial or operational KPIs). Therefore, we believe that disclosure with no greater prominence, coupled with ESMAs emphasis on transparency, will suffice. (see our response to Question 9) While we support that the proposed definition of APMs includes at least certain numerical nonfinancial measures of performance (e.g. sales per square metre) we are concerned that the proposed guidelines provide less stringent requirements for those measures for example a relief from providing reconciliation to figures included in the financial statements. We suggest that any financial element of an APM is reconciled to the most-relevant GAAP measure, to clarify their inter-relationship. For example, an issuer would reconcile the sales component of its sales per square metre measure to sales as presented in the financial statements. (see our response to Question 7) APMs are an increasingly important topic and we believe it is important that the scope and principles of ESMA s guidance are clear and unambiguous. Therefore, we ask ESMA to consider our more specific comments in the Appendix to this letter. MV/288 2

We generally support the ultimate convergence and international harmonisation around best practice. Following the release of these guidelines, we encourage ESMA to work with securities regulators in other jurisdictions and with IOSCO to further global harmonisation on APMs, as we believe it will benefit all stakeholders to financial reporting. Please contact Mark Vaessen or David Littleford at +44 (0)20 7694 8871 if you wish to discuss any of the issues raised in this letter. Yours sincerely MV/288 3

Appendix Responses to questions posed in the Consultation Paper Q1: Do you agree that the ESMA [draft] guidelines should apply to all issuers defined as a legal issuer governed by private or public law, other than Members State or Member State's regional or local authorities, whose securities are admitted to trading on a regulated market, the issuer being, in the case of depository receipts representing securities, the issuer of the securities represented regardless of the financial reporting framework they use to report? If not, why? We agree with the proposed applicability of the guidelines to all issuers that include APMs in their public documents. Although we support the applicability of these guidelines in the context of different financial reporting frameworks, in our responses to this Consultation Paper we consider IFRS as the primary accounting framework within the EU. Q2: Do you agree that the ESMA [draft] guidelines should apply to APMs included in: a) financial statements prepared in accordance with the applicable financial reporting framework, that are made publicly available, and b) all other issued documents containing regulated information that are made publicly available? If not, why? Scope We agree with ESMA that the guidelines should apply to APMs included in financial statements prepared in accordance with GAAP that are made publicly available. In principle we also agree with the application to APMs in all other issued documents containing regulated information that are made publicly available; however, we question whether there is sufficient clarity as to what are publicly-available documents in the scope of the guidelines and the extent to which ESMA intends to leave this determination to national enforcers. For example, we are uncertain if all (or only certain) press releases and investor presentations are in scope for these guidelines. We recommend that the scope of the guidelines is clarified as to the communications to which it applies. In our view, these guidelines should be applicable to all forms of communication made to the public that include APMs, not necessarily only those that are within documents containing regulatory information. Taken together with the ability to cross-refer to another document (for example published on the entity s website) the intended transparency should be practical, even for APMs that are included in shorter documents (paragraph 8 of Annex III). We also encourage ESMA to consider how to make these guidelines operational for APMs disclosed in oral communications (e.g. analyst calls). MV/288 4

Location of APMs With sufficient transparency applied, we are supportive of the flexibility of including APMs either within or outside of the financial statements. We believe that the ability to use APMs in any document where GAAP measures are also used recognises and reinforces that both GAAP and APMs are relevant tools to assess an issuer s financial performance. We recommend that ESMA explicitly acknowledge that such flexibility is intended and acceptable. However, particularly when APMs are included in the financial statements, we believe that users will want clarity as to the level of assurance or lack thereof to which each APM is subject. Auditors and issuers will undoubtedly seek to achieve clarity e.g. labelling APMs that have not been subject to audit as unaudited but it may be helpful if ESMA includes specific requirement for an issuer to disclose the level of assurance for each APM when they are included within financial statements. Notwithstanding the above, we recognise that information such as pro forma financial information or a profit forecast is better placed outside the financial statements. Please consider also our further comments in response to Question 9 on the prominence with respect to information presented outside financial statements. Q3: Do you believe that the ESMA [draft] guidelines should also be applicable to prospectuses and other related documents, which include APMs (except for pro-forma information, profits forecasts or other measures which have specific requirements set out in the Prospectus Directive or Prospectus Directive implementing regulation)? Please provide your reasons We agree that the guidelines should be applicable to prospectuses and other related documents, consistent with our discussion in Question 2 regarding applicability of the guidelines to all public communications. We believe this is important because if management consider an APM important enough to include in an annual report, they are likely to consider it appropriate also to include that same APM in a prospectus. We believe users of that prospectus would also benefit from the transparency that would be achieved by applying ESMA s guidelines. Q4: Do you believe that issuing ESMA guidelines constitute a useful tool for dealing with the issues encountered with the use of APMs? If not, why? We agree that ESMA s guidelines provide a useful tool for improving disclosures related to APMs. We believe that guidance in this area is helpful given the prevalence of APMs in issuers publicly-available documents. As noted in our cover letter, we encourage ESMA to work with securities regulators in other jurisdictions and IOSCO to further global harmonisation on APMs. MV/288 5

Q5: Do you agree with the suggested scope of the term APM as used in the [draft] guidelines? If not, why? We broadly support the suggested definition/scope of the term APM; however, we have the following concerns as to what should be considered an APM versus a GAAP measure. We question whether subtotals in the financial statements should be considered APMs if their components are implicitly or explicitly defined by GAAP. For instance, Earnings Before Interest and Taxes (EBIT) if this subtotal is comprised of net earnings before income taxes and interest, all calculated consistent with GAAP, would the measure be considered an APM? Similarly, Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) could be considered a GAAP measure assuming Earnings is not an adjusted measure i.e. equals Profit after tax under IFRS. In contrast, we believe that some Adjusted measures (for example Adjusted EBITDA) may be an APM when the adjustment to earnings is not defined in GAAP. We also note that IFRS requires the presentation of subtotals in certain circumstances and that this area of GAAP will continue to evolve. The IASB has recently released the Exposure Draft Disclosure Initiative (Proposed Amendments to IAS 1) as part of its Disclosure Initiative that aims to provide more clarity in respect of presentation of totals and subtotals. We suggest ESMA draft its guidance to remain relevant, notwithstanding the continued evolution of GAAP in this area. Furthermore, IFRS 8 Operating Segments already requires issuers to use measures in its financial statements that are considered APMs. In these circumstances where measures are in compliance with IFRSs but are not defined, we question whether these measures would represent APMs. In practice, we believe that regardless of whether a measure is classified as an APM or not, if an issuer applies ESMA s guidance it is likely to be transparently disclosed and reconciled. However, since the classification of a subtotal as non-gaap has more significant consequences in some jurisdictions outside the EU, it may be appropriate for ESMA to avoid giving such measures the label APM. At the same time we believe that improved transparency remains the primary objective regardless of the label, so in circumstances when in doubt we support considering the measure to be an APM. Q6: Do you believe that issuers should disclose in an appendix to the publication a list giving definitions of all APMs used? If not, why? We support transparent disclosure. While an appendix may be one way to achieve this, we are concerned that it is not the only way and may be less effective in some publications. We are therefore supportive of not requiring any particular approach. MV/288 6

We support providing a clear indication of any new APMs, any that have changed and any whose presentation has been either discontinued or given less prominence in the current period. See below our response to question 10. In finalising its guidelines, we encourage ESMA to consider the congruency of paragraph 19 of Annex III, which requires the inclusion of an appendix in every document containing regulated information, and paragraph 8 of Annex III, which permits cross-referencing to another document. We propose modifying paragraph 19 to read...used in an appendix to the publication, notwithstanding the guidelines in paragraph 8. Q7: Do you agree that issuers should disclose a reconciliation of an APM to the most relevant amount presented in the financial statements? If not, why? We agree with the disclosure of reconciliation of an APM to information presented in the financial statements and believe such reconciliation should be meaningful i.e. reconciliation contains sufficient detail of the material adjustments made to the most-relevant GAAP measure. We believe that such reconciliations will assist an understanding of how the financial elements of the presented measure differ from relevant GAAP measures. Where a measure is part financial e.g. sales per square metre we believe that the financial element (sales) should be reconciled to sales as reported in the financial statements. Such reconciliation will assist transparency by highlighting how that element relates to those figures in the financial statements (e.g. whether sales from associates are included, what like-for-like sales adjustments have been made). Q8: Do you agree that issuers should explain the use of APMs? If not, why? We agree that issuers should explain why they have chosen to present a certain APM. Users will benefit from an understanding of management s rationale for its use. Q9: Do you agree that APMs presented outside financial statements should be displayed with less prominence, emphasis or authority than measures directly stemming from financial statements prepared in accordance with the applicable financial reporting framework? If not, why? Prominence While we agree with ESMA that APMs should not be presented with any greater prominence, emphasis or authority than the corresponding GAAP measures directly stemming from financial statements, we suggest that the guideline should be broadened to allow a presentation with equal or less prominence, emphasis or authority (hereafter prominence ). We believe that a presentation with less prominence would require subjective evaluation by issuers and may be difficult to enforce by regulators. For example, does putting a measure in a box, a different colour or in italics increase its prominence, or diminish it? One could also MV/288 7

argue that including disclosure around an APM to explain its context draws attention to it, and thus creates more prominence. Less prominence may be impracticable where there is no relevant GAAP measure (as is the case with some non-financial or operational KPIs). In our view, disclosure with no greater prominence should deliver the desired transparency. Furthermore, we propose that this guideline applies also to information within the financial statements. We believe that the prominence principle may be even more important in the context of information presented within the financial statements. We recommend maintaining consistency in presentation requirements with regard to prominence for all APMs, regardless of where they are disclosed. We are also uncertain as to the extent to which a GAAP measure needs to be presented with an APM. If a GAAP measure is presented in the reconciliation, is that sufficient, or need it be repeated every time the APM is used? If the objective of the guidelines is to require presentation of the most-relevant GAAP measure whenever an APM is mentioned, we are concerned that the repetition of both measures in every instance will make it onerous for users to understand management s messages and may create confusion. In addition, we question the benefit of requiring performance analysis using APMs presented outside financial statements, and another one using corresponding figures from financial statements that is presented with greater prominence (see paragraph 29 of Annex III). It may be onerous considering reconciliation is already required, may lead to unnecessary duplication, and detract from effective communication. We suggest that ESMA removes or clarifies this proposed requirement in paragraph 29 of Annex III. As an editorial note, we suggest replacing corresponding figures with corresponding amounts as corresponding figures can be misunderstood as comparative financial information. Q10: Do you agree that issuers should explain the reasons for changing the definition and/or calculation of an APM? If not, why? We agree that issuers should explain the reasons for changing the definition and/or calculation of an APM. Users need to understand how an APM has been changed to assess the impact on the measure s relevance and comparability (both to prior periods and other issuers). We also believe that issuers should explain the reasons for changing the placement or prominence of an APM. For example, an issuer presents an APM on the face of the financial statements in one year, but in the next year presents that same measure in the notes or even outside the financial statements. Such explanations will ensure that users understand why management have chosen to amend the definition or placement of an APM. MV/288 8

Q11: Do you believe that issuers should provide comparatives and / or restatements when an APM changes? If not, why? We agree that it is preferable for issuers to provide comparative figures and/or restate previously-disclosed APMs if the measure used changes. Comparative/restatement disclosure allows users to understand how the change in APM relates to previous periods and previouslydisclosed APMs and GAAP measures. However, there should be some acknowledgement that this may not always be practicable or the costs to develop it would be excessive. This is an acknowledged approach in IFRSs themselves (see for example IFRS 8.29). Q12: Do you believe that issuers should provide explanations when they no longer use an APM? If not, why? We agree that an explanation for discontinuation of an APM is appropriate. This ensures consistency with the disclosures required where an APM is amended. Q13: Do you agree that the [draft] guidelines will improve transparency, neutrality and comparability on financial performance measures to users? If not, please provide suggestions. Notwithstanding our comments, considerations and suggestions we have included in Questions 1 through 12, we believe that ESMA s guidelines will lead to improvement in transparency and comparability of APMs, and in the long term, it may enhance neutrality of information provided to users. However, we do urge ESMA to work with IOSCO towards global harmonisation of approaches to APMs. We also believe that consistency and comparability could be further enhanced if industry bodies deliver sector-specific definitions of KPIs used on an industry/a sector-wide basis. While we note the references to enhancing usefulness of financial information to the users in the proposed guidelines, we encourage ESMA to consider whether the final guidelines should put more emphasis on an overall principle, for example that APMs should be used to enhance the understanding of users of the information (see paragraph 4 of Annex III), and not to mislead users or obscure relevant information. Assurance Given the increasing use of APMs by investors, we believe that there may be demand for independent assurance (e.g. audit or review) of APMs or an evaluation of the appropriateness of the measures by those charged with governance. ESMA s proposal to require more direct reconciliations to GAAP measures should provide a better link to audited GAAP information by helping to augment the credibility of the information. As investors come to rely increasingly on non-gaap information provided in MV/288 9

financial reports or other communications, we would expect that there may be a higher demand for assurance on such measures. In the meantime, regardless of the positioning of the APMs, it will be important for issuers to distinguish clearly those measures that are subject to audit or different level of assurance from those that are not subject to any assurance for example by appropriate label. This is particularly relevant when the APMs are presented on pages that also include audited information. Such disclosure is required by regulators in some jurisdictions. As these measures become more prevalent, we believe that users of the financial statements will demand more scrutiny (both internal and external) on the measures chosen, and encourage ESMA to consider how that demand can be met. For example, greater clarity as to the responsibility of those charged with governance for APMs presented by management may be appropriate. Q14: Do you agree with the analysis of the cost and benefit impact of the [draft] guidelines? Please provide any evidence or data that would further inform the analysis of the likely cost and benefits impacts of the proposals. We have no significant evidence or data to supplement this analysis. We agree in principle with ESMA s assessment; however, we have not performed any in-depth analysis to support or refute the arguments made. MV/288 10