The National Securities Market Commission (CNMV) has declared war on terms such as ebitda, recurring operating result or free cash flow, which it considers to be alien to accounting standards and tending to generate confusion among investors.
The supervisor has included this warning in its new observations and criteria on how listed companies must inform the market. Charge against the so-called alternative performance measures, the Alternative Performance Measures (APM), which are those that “are not defined by accounting regulations or other regulations, and are therefore not standardized”.
“The CNMV will exercise its sanctioning powers when it detects information published by issuers in the form of APMs that mislead the public or contain inaccurate or untrue data, and it is determined that they constitute a breach of the legally applicable regulations on transparency or market abuse” , affirms the organization chaired by Rodrigo Buenaventura.
In this particular accounting crusade, the reluctance of the CNMV towards a term as frequent as ebitda is striking, which many Spanish listed companies consider the best indicator of their activity, as it reflects the difference between income and expenses.
This variable measures profit before interest, taxes, depreciation and amortization, and is usually presented as reliable data to measure margins and business in gross terms. The level of indebtedness, or leverage, is usually measured as the ratio of ebitda to debt, and company valuations are often presented as a multiple of ebitda.
When resorting to ebitda and alternative variables, indicates the CNMV, “it is essential that entities provide sufficient information so that the investor can understand what these financial magnitudes represent and thus facilitate their comparability and reliability”. The supervisor criticizes the use of the term “non-recurring” without explaining its origin and adequately justifying said nature.
He doesn’t rail against the use of these terms so much as the “prominence, emphasis, or authority” with which they are presented in business results. These magnitudes, he assures, “divert attention from the presentation of the measures derived directly from the financial statements.”
