Insights on Ind AS 118
Understanding the Identification and Disclosure Requirements of Managementdefined Performance Measures
CA Bhawna Grover
Manager - Research and Advisory, Taxmann
CA Prajwal Jha
Associate - Research and Advisory, Taxmann
Insights on Ind AS 118
Understanding the Identification and Disclosure Requirements of Managementdefined Performance Measures
CA Bhawna Grover
Manager - Research and Advisory, Taxmann
CA Prajwal Jha
Associate - Research and Advisory, Taxmann
Contents 1.
Introduction
5
2.
What is Management-defined performance measure?
5
3.
Case scenario
5
4.
Ind AS 118 Provisions Relevant to the Case
6
5.
Analysis of the case
8
6.
Conclusion
10
1. Introduction The Ind AS 118, Presentation and Disclosure in Financial Statements introduces specific requirements for management-defined performance measures (MPMs). The objective is to bring greater transparency to performance measures that entities communicate outside their financial statements but which are not specifically defined or required by Ind ASs. This becomes particularly relevant where an entity presents measures such as “adjusted operating profit”, “adjusted EBITDA” or “operating profit before exceptional items” in investor presentations, management commentary or other public communications. The mere fact that such a measure is not presented in the financial statements does not necessarily mean that it falls outside the scope of the MPM requirements.
2. What is Management-defined performance measure? A management-defined performance measure is a subtotal of income and expenses that an entity uses in its public communications outside the financial statements to communicate management’s view of an aspect of the financial performance of the entity as a whole. However, a subtotal will qualify as an MPM only when it is not one of the subtotals specifically excluded under paragraph 118 and is not otherwise specifically required to be presented or disclosed by Ind ASs. Thus, measures such as “Adjusted Operating Profit” may fall within the scope of MPM requirements when they are publicly communicated to users to explain management’s assessment of the entity’s overall financial performance. Let us understand with the help of case study.
3. Case scenario Alpha Industries Limited hereinafter referred to as “the company” is a listed entity engaged in the manufacture and sale of consumer products. During the year ended March 31, 2028, the company reported operating profit of ₹420 crore. During the year, the company incurred ₹35 crore towards restructuring costs arising from closure of one of its manufacturing facilities and ₹20 crore towards an impairment loss recognised on certain assets. Both amounts were recognised in accordance with the applicable Ind AS requirements and included in the company’s profit or loss. In its annual investor presentation and earnings release, the company highlighted a performance measure termed “Adjusted Operating Profit”. The company calculated this measure by excluding restructuring costs and impairment losses from operating profit. Accordingly, the Adjusted Operating Profit reported to investors was ₹475 crore. The company explained in its investor presentation that Adjusted Operating Profit was used by management to assess the underlying performance of the business and to
Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
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help investors understand the company’s operating performance excluding items that management considered to be non-recurring. However, the company did not present Adjusted Operating Profit as a subtotal in its statement of profit and loss. It also did not provide a reconciliation between Adjusted Operating Profit and operating profit in its financial statements. The finance team takes the view that since Adjusted Operating Profit is not presented in the financial statements and operating profit is already a subtotal required under Ind AS 118, the additional disclosure requirements relating to management-defined performance measures would not apply. The company therefore needs to determine whether Adjusted Operating Profit would constitute a management-defined performance measure and, if so, what disclosures would be required. Thus, whether Adjusted Operating Profit, which is communicated by the company in its investor presentation and used by management to assess the company’s performance, would constitute a management-defined performance measure under Ind AS 118?
4. Ind AS 118 Provisions Relevant to the Case The following provisions of Ind AS 118 are relevant to the facts and circumstances of the case. These requirements provide the framework for analysing the issue and determining the appropriate presentation and classification.
4.1
When a Performance Measure Becomes an MPM
A management-defined performance measure is a subtotal of income and expenses that satisfies three conditions. First, the entity must use the subtotal in public communications outside the financial statements. Second, the subtotal must be used to communicate management’s view of an aspect of the financial performance of the entity as a whole. Third, the subtotal must not be one of the measures specifically excluded from the MPM requirements or a total or subtotal specifically required to be presented or disclosed by Ind ASs. Thus, the fact that a measure is internally developed by management does not, by itself, make it an MPM. The manner in which the measure is communicated and the purpose for which it is used are also relevant.
4.2 Certain Common Performance Subtotals are outside the MPM requirements The Exposure Draft specifically excludes certain subtotals from the definition of MPM. These include gross profit or loss and similar subtotals, operating profit or loss before depreciation, amortisation and impairments within the scope of Ind AS 36, specified subtotals involving equity-accounted investments, specified operating and investing subtotals, profit or loss before income taxes and profit or loss from continuing operations.
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Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
Therefore, an entity is not required to treat every subtotal used in its communications as an MPM. The first step is to determine whether the measure falls within the definition and whether it is specifically excluded.
4.3 Publicly Communicated Subtotals are generally presumed to reflect Management’s View Where an entity uses a subtotal of income and expenses in public communications outside its financial statements, the Exposure Draft requires the entity to presume that the subtotal communicates management’s view of an aspect of the financial performance of the entity as a whole. This presumption can be rebutted only when the entity has reasonable and supportable information demonstrating that the subtotal does not communicate management’s view of the entity’s overall financial performance.
4.4 MPM Disclosures are intended to explain Management’s View of Performance The objective of the MPM disclosures is to help users understand two things: the aspect of financial performance that management considers the MPM to communicate and how the MPM compares with the measures defined by Ind ASs. All information relating to MPMs is required to be presented in a single note to the financial statements. The note must also state that MPMs provide management’s view of an aspect of the financial performance of the entity as a whole and are not necessarily comparable with measures having similar labels or descriptions used by other entities.
4.5 Each MPM requires clear explanation and reconciliation Each MPM must be labelled and described in a clear and understandable manner that does not mislead users. The entity is required to explain the aspect of financial performance communicated by the MPM and why management considers the measure useful. It must also explain how the measure is calculated and provide a reconciliation between the MPM and the most directly comparable subtotal specified in paragraph 118 or another total or subtotal specifically required to be presented or disclosed by Ind ASs. In addition, the entity must disclose the income-tax effect and the effect on non-controlling interests for each item included in the reconciliation. The entity must also explain how it determined the income-tax effect.
4.6 Changes in an MPM require explanation and restated Comparatives If an entity changes the calculation of an MPM, introduces a new MPM, stops using a previously disclosed MPM or changes the manner in which it determines the income-tax effects of reconciling items, it must explain the change and the reasons for it.
Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
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The entity is also required to provide restated comparative information reflecting the change, addition or cessation unless doing so is impracticable. If comparative information is not restated because it is impracticable, that fact must be disclosed. The selection of an MPM is not treated as an accounting policy choice.
4.7 An MPM may qualify even when it is not presented in the Statement of Profit and Loss An MPM does not have to be presented as a separate subtotal in the statement of profit and loss. A measure can qualify as an MPM even when it is communicated outside the financial statements and is not separately presented in the statement of profit and loss. Accordingly, the absence of a separate line item for an MPM in the statement of profit and loss does not, by itself, take the measure outside the MPM requirements.
4.8 The Reconciliation should explain the Nature of Adjustments The reconciliation of an MPM should enable users to understand how the measure differs from the most directly comparable subtotal. For each reconciling item, the entity is required to disclose the amount relating to each relevant line item in the statement of profit and loss. Where necessary, the entity should also explain how the reconciling item is calculated and how it contributes to the usefulness of the MPM. Where different adjustments are made for different reasons, the entity should explain which adjustments relate to which basis of adjustment.
5. Analysis of the case The first question is whether Adjusted Operating Profit is a subtotal of income and expenses. The company starts with operating profit of ₹420 crore and adjusts it by excluding restructuring costs of ₹35 crore and impairment loss of ₹20 crore. The resulting ₹475 crore is therefore a subtotal derived from income and expenses recognised in the statement of profit and loss. The next consideration is whether the measure is used in public communications outside the financial statements. In the present case, the company has communicated Adjusted Operating Profit through its investor presentation and earnings release. These are specifically the type of external communications that are relevant when identifying MPMs. Therefore, the measure satisfies this aspect of the definition. The measure must also communicate management’s view of an aspect of the financial performance of the entity as a whole. Here, management has expressly stated that Adjusted Operating Profit is used to assess the company’s underlying operating performance and to help investors understand operating performance after excluding items considered non-recurring. The measure is therefore being used to communicate management’s assessment of the company’s overall operating performance rather than the performance of a particular segment.
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Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
Further, the company cannot avoid the MPM requirements merely because the measure is not presented in the statement of profit and loss. The application guidance makes it clear that an MPM can qualify whether or not it is presented in the statement of profit and loss. Therefore, the finance team’s argument that the measure falls outside the requirements because it appears only in the investor presentation and earnings release would not, by itself, be sufficient. It is also necessary to consider whether Adjusted Operating Profit is one of the subtotals specifically excluded from the definition. The measure is not gross profit, profit before income taxes, profit from continuing operations or any of the other subtotals identified in paragraph 118. Nor is it a subtotal specifically required to be presented or disclosed by Ind ASs. Instead, it is an entity-specific measure created by management by adjusting operating profit for selected expenses. The fact that operating profit is itself a subtotal required under the proposed Ind AS 118 does not change this assessment. The company is not simply communicating operating profit; it is communicating a separate subtotal derived by removing particular expenses from operating profit. Accordingly, the measure needs to be assessed independently against the MPM definition. The nature of the adjustments also supports this assessment. The company excludes ₹35 crore of restructuring costs and ₹20 crore of impairment loss because management considers these items to be non-recurring. The Ind AS 118 specifically contemplates situations where an entity excludes particular items of expense from an MPM because they are considered non-recurring or because they arise for another specified reason. Such adjustments therefore need to be explained rather than simply presented as an unexplained difference between the MPM and operating profit. Accordingly, Adjusted Operating Profit would meet the definition of an MPM under the proposed requirements, based on the facts of the case. Once the measure is identified as an MPM, the company would be required to provide the prescribed disclosures in a single note. The company would need to explain what aspect of performance Adjusted Operating Profit is intended to communicate and why management considers it useful. It would also need to explain how the measure is calculated. Since operating profit is the most directly comparable subtotal in this case, the company would need to reconcile Adjusted Operating Profit of ₹475 crore with operating profit of ₹420 crore. The reconciliation would show the ₹35 crore restructuring cost and ₹20 crore impairment loss as the adjustments resulting in the difference between the two measures. The company would also need to disclose the income-tax effect and the effect on noncontrolling interests, where applicable, for each reconciling item, together with an explanation of how the tax effect has been determined.
Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
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6. Conclusion The proposed Ind AS 118 introduces a structured framework for dealing with managementdefined performance measures to improve the transparency and usefulness of financial performance information communicated to users. The requirements focus not merely on the figures presented in the financial statements, but also on performance measures that management communicates through external channels such as investor presentations and earnings releases. The identification of an MPM requires consideration of the nature of the measure, the manner in which it is communicated and whether it reflects management’s view of an aspect of the entity’s overall financial performance. At the same time, the Ind AS 118 excludes certain specified subtotals from the MPM requirements, ensuring that the framework is directed towards entity-specific performance measures rather than every alternative measure used by an entity. Once a measure qualifies as an MPM, the proposed requirements place significant emphasis on transparency. Entities would need to explain the purpose and calculation of the measure, reconcile it with the most directly comparable Ind AS-defined subtotal, and provide the related tax and non-controlling interest effects. These disclosures are intended to enable users to understand both what the measure represents and how it differs from the measures defined by Ind ASs. Accordingly, the MPM requirements represent an important shift towards greater discipline and transparency in the communication of alternative performance measures. They seek to ensure that measures developed and communicated by management are accompanied by sufficient information for users to understand their basis and assess them alongside the measures presented under Ind AS 118.
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Insights on Ind AS 118 Understanding the Identification and Disclosure Requirements of Management-defined Performance Measures
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