The requirement for public companies to file audited financial statements prepared according to Generally Accepted Accounting Principles (GAAP) dates to the 1930s. Since then, there has been a growing sense that managers do not use these general-purpose financial statements to continuously manage their businesses, as they do not, in many cases, provide good measures of absolute or relative operating performance. Today, most figures and information used by investment analysts are not based on GAAP. These corporate disclosures, known collectively as alternative performance measures (APM), have little or no standards, structure, or independent verification associated with them. The creation of APM standards has been hampered by the fact that APMs tend to be very industry-specific, and APM reporting does not fall clearly into the remit of a single standard-setter or regulator. 

The Quest for Meaningful Financial Reporting

The issue of the lack of standards for APMs was raised at a May 15, 2018, meeting of the Bank of Canada and Canada’s eight largest pension funds. At this meeting, Stephen Poloz, then Governor of the Bank of Canada, suggested that the pension funds establish a working group in conjunction with CFA Society Toronto and CFA Societies Canada to review the issue and consider potential alternatives for forming a process for establishing standards in APMs.

Since then, the Canadian Coalition for Good Governance have been added to the working group. Originally named the Alternative Performance Measures Working Group, it was later incorporated as a non-profit and now operates as the Industry Standards Reporting Research Council (ISRRC). Its objective is to identify if there is a need for APM standards and, if so, determine how to develop standards for APMs on an industry-specific basis.

The ISRRC pilot project

The working group initially determined that a pilot project would provide the best proof of concept of the ability to set standards for APMs.

The objectives of the pilot project are to:

1. Assess the feasibility and viability of a standard-setting process for industry-specific standards that would improve corporate disclosure quality, usefulness, and comparability
2. If that standard-setting process is considered viable, determine the appropriateness of establishing a sector accounting standards board

The objectives of APM standards are to:

• Provide industry-specific standards for the comparability of companies that can be applied in a consistent manner
• Focus on the needs of the end-user (investors and analysts) and not the preparer
• Be internationally relevant

The key performance indicators are that the APM standards are:

1. Used by the international investment community
2. Embraced by the issuers
3. Supported by the international accounting standard-setters and securities regulators

Two separate industries, real estate and oilfield services, were used as the test industries for the pilot project to assess the viability of the process, as alternative performance measures are already used extensively in these industrial sectors.

ISRRC oversees consultation with investors, analysts, issuers, industry experts, standard-setters, securities regulators, and other relevant stakeholders to facilitate broad-based adoption of the new APM standard-setting process. The initiative is volunteer-led and has a small budget funded by CFA Societies Canada and the Canadian Maple 8 pension funds.

The pilot project is operated by a nonprofit corporation created specifically for this project. This entity is a subsidiary of CFA Societies Canada; the ultimate ownership and future direction of the organization will be determined by the working group after the pilot project.

Current status of ISRRC and its pilot projects  

Today, ISRRC has substantially finalized its pilot projects, which have validated the need for and viability of an APM standard-setter. Procedures, processes, and a conceptual framework for determining and establishing APM standards are being finalized.

ISRRC has conducted a survey in 74 countries that identifies what information portfolio managers, analysts, and lenders use to make investment and credit decisions. This is the first time this type of information has been collected from users, and it validates ISRRC’s perspective on the widespread use of APMs. Once the results are published, significant interest is expected from traditional standard-setters and global regulators.

Tom Trainor, CFA, the ISRRC’s Canadian Co-Chair, has outlined for The Analyst some of the important early findings of the survey. “We are still analyzing survey results and expect to have final results in later Q1 of 2025. Initial results have indicated that, while company-provided information is still the largest source of information used to make equity and credit investment and lending decisions, the use of alternative performance measures exceeds the use of audited GAAP information.”

Outreach on the project continues, with the objective of familiarizing senior staff at organizations and in the academic and research community with the project and its goals. In addition, ISRRC continues to reach out to regulators, standard-setters, accounting bodies, and governance organizations. ISRRC also has an ongoing dialogue with leading academics and researchers in Canada, the United States, and Europe about the project, its developments, and feedback on improvements to their proposed processes.

ISRRC is finalizing project recommendations and working with senior leadership at CFA Institute to determine the optimal organizational structure and a process for securing support from the global investment community to improve corporate disclosure and reporting.

What the future holds

Regulators have told ISRRC that they would like to see an industry-led solution, so it is incumbent on users and practitioners to make their voices heard. As with other CFA Institute initiatives historically (notably the development of the CFA Code of Ethics and Standards of Professional Conduct and the CFA Performance Presentation Standards in the past), a great deal is being achieved and facilitated by continuing to prepare definitive sets of alternative performance measures with the assistance of practising specialists in various sectors. In time, ISRRC believes regulators and other standard-setters will take increasing notice of what practising analysts and portfolio managers are doing with APM standards and will be encouraged to join and support our endeavours.

The combination of top-down and bottom-up approaches is widely viewed as the most effective way of achieving progress in setting alternative performance measurement standards.

To find out more about developments on this vital project click here.