Jul 14, 2020 / News

Audit and Assurance / Business Consulting / COVID-19

Companies shouldn’t be tempted to disclose EBITDAC(ovid)

Earnings Before Interest Tax Depreciation and Amortisation (“EBITDA”) is a common financial performance measure.

The COVID-19 pandemic has had a significant effect on many businesses and some have been wondering whether they can highlight the impact of COVID-19 and report Earnings Before Interest Tax Depreciation Amortisation and COVID-19, or EBITDAC?

According to the Australian Securities and Investments Commission (“ASIC”), “Non-IFRS profit measures that purport to show the result had the impact of the COVID-19 pandemic not occurred are likely to be misleading. They will be hypothetical and may not show the actual performance of an entity. It may also not be possible to reliably identify and separately quantify the impact of the COVID-19 pandemic. Any non-IFRS profit measures should be unbiased and not used to avoid presenting ‘bad news’ to the market.

Presenting a split of profit or loss between pre-COVID-19 and post-COVID-19 periods is problematic and can be potentially misleading because:

• the cut-off point cannot generally be clearly identified;
• the pre-COVID-19 period may not be representative of future performance;
• the impact of the COVID-19 pandemic is unlikely to be the only factor contributing to changes between pre-COVID-19 and post-COVID-19 results; and
• the effects of the COVID-19 pandemic are unlikely to be constant or uniform in the post-COVID-19 period.”

“It is important that the underlying drivers of the result are discussed in the Directors’ Operating and Financial Review or review of operations. This includes providing an understanding of the impact of the pandemic and all other significant drivers of the result. Any analysis of the result should not be presented in a manner that is potentially misleading.

The result should not be split between pre-COVID-19 and post-COVID-19 periods on the face of the income statement or in the notes to the financial statements. Segment results should cover the entire reporting period and should not exclude the result for all or part of the post-COVID-19 period”, says ASIC.

As ASIC explains, “In some cases, it may be possible to quantify and disclose in the notes to the financial statements specific types of transactions as significant items included in the result that arose solely due to the impact of the COVID-19 pandemic (e.g. government support). However, it is not appropriate to treat all ongoing operating costs as a significant item during a period of reduced revenue.

An explanation should be given as to why an item is described as solely COVID-19 related. Where an item is not solely COVID-19 related, other contributing factors should also be clearly described. It may be misleading to describe a COVID-19 related expense as being non-recurring, particularly where the effects of the COVID-19 pandemic cross over a balance date. It should be clearly disclosed that any significant items attributed in whole or part to the COVID-19 pandemic are not the only affected items. For example, other items of revenue and expense are also likely to be affected.

It may not be possible to attribute some items such as impairment losses or changes in sales revenue solely to the impact of the COVID-19 pandemic and to separately quantify the amounts attributable to different causes.” ASIC also refers directors to their Regulatory Guide 230 Disclosing non-IFRS financial information.

We agree that it will be extremely difficult to ring-fence COVID-19 financial effects from other elements within a company’s financial results in a way that’s not potentially misleading to readers. Similar problems arise with reporting ‘normalised’ profit results in 2020.  For companies in hard hit sectors such as travel, tourism, tertiary education, entertainment or hospitality, how is ‘normalised’ to be defined? 

Don’t be tempted. EBITDAC won’t be the trending financial performance measure for 2020.

Next steps

If you have any questions on the contents of this update, please do not hesitate to contact your Nexia Edwards Marshall Advisor. 

The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.