Why Non-IFRS Metrics Are a Hot Topic Right Now
Imagine a company reports a loss under standard accounting rules — but simultaneously tells investors it made a healthy "adjusted profit." Which number should you trust? This is exactly the tension at the heart of non-IFRS metrics and alternative performance measures (APMs).
For CA students at the Intermediate and Final levels, this topic sits at the intersection of Financial Reporting, Auditing, and Corporate Governance. Let's break it down clearly.
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What Are Alternative Performance Measures (APMs)?
APMs are financial figures that a company presents voluntarily, outside the scope of Ind AS or IFRS standards. They are also commonly called:
- Non-IFRS metrics
- Non-GAAP measures
- Adjusted earnings / EBITDA
- Underlying profit / Normalised results
- Free cash flow (when defined internally)
A company might strip out restructuring costs, impairment charges, or foreign exchange losses to show a "cleaner" picture of performance. Sometimes this is genuinely useful. Other times, it flatters the numbers.
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Why Do Regulators Worry?
Regulators across the world — including SEBI in India — are increasingly concerned because APMs can:
- Mislead investors who compare APMs across companies without realising each company defines them differently.
- Overshadow statutory numbers — the Ind AS-compliant figures that are audited and standardised.
- Create information asymmetry — management selectively highlights the metric that looks best.
- Lack consistency — a company may quietly change its APM definition year after year without proper disclosure.
SEBI has issued guidelines requiring listed entities to ensure that any non-IFRS metric presented in earnings releases or investor presentations is clearly labelled, consistently defined, and reconciled to the nearest Ind AS / IFRS figure. Always verify the latest SEBI circulars and ICAI announcements for current thresholds and requirements.
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The Reconciliation Requirement — The Golden Rule
If there is one concept to remember about APMs, it is this:
> Every APM must be reconciled to its nearest Ind AS equivalent.
For example, if a company presents "Adjusted EBITDA," it must show:
- Start with: Profit before tax (Ind AS figure)
- Add back: Depreciation & Amortisation
- Add back: Finance costs
- Adjust for: One-off restructuring charges (clearly described)
- Equals: Adjusted EBITDA (the APM)
This reconciliation makes the bridge transparent. Without it, the APM floats in the air with no anchor to verifiable numbers.
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What Must Auditors Disclose?
This is where your audit knowledge connects. Auditors have specific responsibilities when APMs appear in documents:
In the Audit Report (Annual Report)
If APMs appear in the Other Information section (the Directors' Report, Management Discussion & Analysis, etc.), auditors must:
- Read that information carefully
- Check whether it is materially inconsistent with the audited financial statements
- Report the inconsistency if one is found
The auditor is not required to audit APMs themselves — but they cannot ignore obvious contradictions between an APM and what the audited numbers show.
In Prospectuses and Offer Documents
Here the responsibility is higher. Auditors may be asked to provide a comfort letter or limited assurance on APM figures included in prospectuses.
Key Matters to Flag
Auditors should consider whether:
- Adjustments made to arrive at an APM are truly one-time or recurring in nature
- The APM is given more prominence than Ind AS figures in a way that could mislead
- Definitions have changed without disclosure between periods
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A Simple Logic Example (Not a Copied Exam Question)
Suppose Company X reports:
- Net Profit (Ind AS): ₹10 crore
- Adjusted Net Profit (APM): ₹25 crore
The ₹15 crore difference is explained as "exceptional impairment on an old plant."
As an auditor reviewing the Other Information, you would ask:
- Is this impairment genuinely non-recurring?
- Was the same plant flagged as impaired last year too?
- Is the APM prominently displayed on Page 1 while the Ind AS profit is buried on Page 18?
If the impairment is recurring and the APM is given greater prominence, that is a red flag you must consider reporting.
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Ind AS Context for Students
Under the Ind AS framework, there is no specific standard governing APMs — which is precisely why they require extra vigilance. Ind AS 1 (Presentation of Financial Statements) governs what must appear in the primary statements, but it does not restrict what companies say outside those statements.
This regulatory gap is why bodies like IOSCO globally, and SEBI in India, have stepped in with separate guidance. Always verify the latest ICAI study material and SEBI announcements for updated disclosure requirements applicable to your exam.
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FAQs
Q1. Are APMs banned under Ind AS? No, they are not banned. Companies are free to present additional metrics, but they must label them clearly as non-Ind AS measures, define them consistently, and provide a reconciliation to the nearest Ind AS figure.
Q2. Does an auditor need to verify every APM in an annual report? Not in a full audit sense. The auditor reads Other Information (which may contain APMs) and reports material inconsistencies with the audited financial statements. A deeper assurance engagement would require a separate mandate.
Q3. Can an APM be shown more prominently than Ind AS profit? Regulators strongly discourage this. SEBI guidelines require that Ind AS / IFRS figures receive at least equal prominence. Giving an APM greater emphasis without clear labelling is a key concern auditors should flag.
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Mastering topics like non-IFRS metrics and auditor disclosure requires practice with real-world scenarios, not just theory. Use the free day-by-day study planner at https://caparveensharma.com/free-planner?src=article to schedule your Financial Reporting and Auditing revision systematically. For case-scenario-based practice that mirrors the exam style, explore the courses at https://caparveensharma.com — because understanding the why behind a disclosure rule is what separates a good answer from a great one.