In the ongoing fight against misleading financial disclosure, global securities regulators have issued revised guidance on the use of alternative accounting metrics.
The International Organization of Securities Commissions (IOSCO) published an updated policy statement on the application of non-GAAP financial measures — which issuers can use to provide greater insight into their financial performance, but also runs the risk of investors facing misleading disclosure.
While alternative performance metrics can provide issuers with greater flexibility when reporting their financial results, “Problems can arise … when non-GAAP financial measures are presented inconsistently, defined inadequately, or obscure financial results determined in accordance with GAAP,” the regulators said.
At the same time, these kinds of metrics typically don’t have a standardized meaning, and as a result, they are “generally not comparable from one issuer to the next,” they added.
In response to these kinds of long-standing concerns, IOSCO updated its guidance in this area, which was last revised in 2016, and aims to reinforce the regulators’ “commitment to clear, useful and standardized disclosures to reduce risks for investors and other users of financial information.”
In particular, the latest revision aims to “address the interaction between non-GAAP financial measures … and similar financial measures, such as management-defined performance measures,” the statement said.
Against that backdrop, the revised policy provides guidance on defining non-GAAP metrics, using these metrics consistently over time, and reconciling comparable GAAP and non-GAAP measures.
It also stressed that non-GAAP measures shouldn’t be given greater prominence in firms’ disclosures and that they “should not be used to avoid presenting adverse information to the market.”
IOSCO’s updated guidance comes amid the Canadian Securities Administrators’ (CSA) ongoing efforts to ensure that issuers’ use of alternative financial metrics doesn’t mislead investors.
Last November, the CSA proposed changes to its rules on the use of non-GAAP metrics that grapples with some of the same issues raised in IOSCO’s new guidance, amid the adoption of a new accounting standard on financial statement disclosure, IFRS 18. With that standard set to take effect in January 2027, the CSA’s focus is primarily to ensure its requirements in this area continue to apply, while also enabling issuers to avoid duplication in their regulatory demands.
Among other things, the CSA’s proposals would add “prominence disclosure” requirements for non-GAAP measures, include measures to help issuers avoid duplicative disclosure, consolidate existing exemptive relief, and amend the definition of non-GAAP metrics to include management-defined performance measures (MPMs).
The comment period on those proposals closed on Feb. 11.
Notwithstanding the regulators’ efforts to ensure that issuers aren’t providing misleading disclosure, IOSCO also cautioned investors to continue to “exercise care when interpreting non-GAAP financial measures…”