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ACCA Strategic Professional · Strategic Business Reporting (International) · Analysis and interpretation of financial and non-financial information and measurement of performance

Zenith plc presents 'Adjusted operating profit' in its annual report, defined as operating profit before restructuring costs. Restructuring costs have arisen in each of the last four years. Which approach to presenting this alternative performance measure (APM) is most consistent with the IFRS Accounting Standards requirements and the IASB's approach to management-defined performance measures?

The adjusted measure must be clearly defined, explained and reconciled to the most directly comparable IFRS subtotal, and must not be given greater prominence than the IFRS totals. Doing otherwise, or using a misleading label, would reduce comparability and could mislead users.

  1. APresent the adjusted measure with equal or greater prominence than IFRS subtotals, since management considers it more relevant
  2. BReconcile the measure to the most directly comparable IFRS subtotal, explain its purpose and definition, and give it no greater prominence than IFRS totalsCorrect
  3. COmit any reconciliation because restructuring costs are disclosed elsewhere in the notes
  4. DRelabel the measure as 'Operating profit' so that users find it familiar

Explanation

IFRS 18 requires management-defined performance measures that are disclosed in the financial statements to be explained, reconciled to the most directly comparable IFRS-specified subtotal, and clearly labelled. Giving the APM more prominence than IFRS totals or labelling it with a misleading name undermines faithful representation. Reference to notes elsewhere does not replace a reconciliation.

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