OPINION: New guidelines for the use of pro-forma financial information are an important tool for improving the intelligibility of company media releases, updates and annual reports.

In November, I commented on the worrying trend for publicly listed companies to create two versions of their financial statements - one prepared in accordance with generally accepted accounting principles (GAAP) and the other a different, and often more attractive, pro forma statement using alternative profit measures.

In June, Deloitte released a survey which found 89 of 100 companies used alternative profit measures in their annual reports for 2011 - with a total of 250 different earnings or profit measures used across the sample.

This presents a considerable challenge to investors and the public, and also to market analysts, in terms of understanding enough about the measures being used to accurately compare the performance of companies to one another, or to previous results that may have been reported using different measures.

The Financial Markets Authority is due to release its guidance on disclosing non-GAAP financial information in August.

The FMA principles include that companies should explain to the market why an alternative profit measure is useful. They also need to ensure that the alternative measure does not overshadow the reporting of statutory profit measures in accordance with NZ International Financial Reporting Standards (IFRS), which is the GAAP for New Zealand's public companies.

An explanation of how the non-GAAP measure is calculated, and a reconciliation of non-GAAP and GAAP measures is recommended. And a consistent year-on-year approach is advised to allow useful comparisons.

The full set of guidelines will come into force on January 1, 2013.

NZICA is strongly supportive of the FMA's move. However, I would like to draw a distinction between non-GAAP information presented in financial reports, and the information presented in the audited financial statements.

A concern has been raised by our members that audited financial statements prepared in accordance with IFRS are too complex and all but incomprehensible to many readers - including business owners and managers.

Providing more intelligible accounts, based on management's understanding of company performance, is one of the potential benefits associated with non-GAAP information.

However, consistent use of IFRS worldwide is vital for coherent capital markets and we need to accept that NZ IFRS cannot diverge from that.

If a pro forma measure appears after a company has a poor profit result, or is used without a simple explanation as to its value, then it should be approached cautiously.

Lastly, I urge directors to review the FMA guidelines when they are released next month. Adherence to those guidelines has the potential to vastly improve the use of pro forma reporting in media releases, updates and annual reports. This can only be of benefit to companies, investors and the public alike.

- Terry McLaughlin is chief executive of New Zealand Institute of Chartered Accountants.

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