By Huw Jones
LONDON (Reuters) – Listed companies must standardize their definition of operating profit in financial statements to help investors make comparisons more easily, an international standard setting body proposed on Tuesday.
The International Accounting Standards Board (IASB) said a sample of 100 companies found that 63 were using at least nine different definitions of operating profit.
Hans Hoogervorst, chair of the IASB whose rules are mandatory for listed companies in over 140 countries, including the European Union but not the United States, said the proposal was a “game changer”.
“Investors have been yearning for this for a long time,” Hoogervorst said.
“When investors want to make an estimate of the value of a company, they want to look at profit and loss, and at the operating profit and sustainability of earnings.”
Operating profit is a subtotal in statements that reflects the core business of a company, Hoogervorst said. An operating profit as defined by the IASB would also be subject to external auditor checks.
The proposal is being put out to public consultation and a final rule would not come into effect before 2022.
As more financial information is being produced and consumed electronically, a single definition set by regulators is needed when comparing hundreds of companies, Hoogervorst said.
A mandatory operating profit definition is part of a package that will introduce more “discipline” in the use of “non-GAAP” figures in financial statements, a reference to earnings numbers that are not defined by regulators.
Graphic: IASB Graphic, click https://tmsnrt.rs/38CdSZK
The IASB is proposing guidance for companies to shed more light on “unusual” or one-off income or expense items to help investors predict future cash flows better.
It would be harder for companies to lump together items without proper labeling or explanations.
“We do not say every unusual item is a bit fishy, but it will be more disciplined in the future,” Hoogervorst said.
Companies will also have to explain their use of “performance measures” like adjusted operating profit that are not defined by regulators.
They will also have to reconcile these performance measures with figures in company statements that are defined by regulators.
Self-defined performance measures often show rosier outcomes than measures set out by regulators, Hoogervorst said.
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