Page 503 - SBR Integrated Workbook STUDENT S18-J19

Answers

Example 4

Additional performance measures

Some argue that the disclosure of APMs enables companies to present their
performance in an over-optimistic way. As can be seen, the adjustments
made have turned Bluebird’s loss before tax into a profit. The rationale behind
this APM might be to disguise a weak performance.

It can be useful to exclude non-recurring items when calculating APMs as this
may help stakeholders to better assess the future prospects of an entity.
However, the adjustments that Bluebird has made when calculating
‘underlying profit before tax’ are questionable.

Impairments are suggestive of a weaker than expected performance, both in
the current and future periods. Eliminating impairment losses somewhat
downplays their importance when assessing the future cash flows of the
entity.

Foreign exchange losses and gains are volatile. However, Bluebird’s
receivables are short-term and so it is unlikely that the exchange loss will
reverse before the receivables are settled. Moreover, the loss is not outside of
management’s control as they could have entered into derivative contracts to
reduce their exposure to currency risk. This loss is vital to assessing both the
future cash flows of the business and also the directors’ risk management.

Restructuring costs are often non-recurring. However, they have been
incurred in consecutive years. This suggests that they are not a ‘one off’
expense, and that restructuring is a central part of Bluebird’s current business
activities.

Bluebird reconciles the APM to the financial statements enabling its investors
to assess the legitimacy of the adjustments made. However, if displayed with
prominence, this APM could be misleading.

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