Question 4a

(a) Toobasco is in the retail industry. In the reporting of financial information, the directors have disclosed several alternative performance measures (APMs), other than those defined or specified under IFRS Standards. The directors have disclosed the following APMs:

(i) ‘Operating profit before extraordinary items’ is often used as the headline measure of the Group’s performance, and is based on operating profit before the impact of extraordinary items. Extraordinary items relate to certain costs or incomes which are excluded by virtue of their size and are deemed to be non-recurring. Toobasco has included restructuring costs and impairment losses in extraordinary items. Both items had appeared at similar amounts in the financial statements of the two previous years and were likely to occur in future years.

(ii) ‘Operating free cash flow’ is calculated as cash generated from operations less purchase of property, plant and equipment, purchase of own shares, and the purchase of intangible assets. The directors have described this figure as representing the residual cash flow in the business but have given no detail of its calculation.

They have emphasised its importance to the success of the business. They have also shown free cash flow per share in bold next to earnings per share in order to emphasise the entity’s ability to turn its earnings into cash.

(iii) ‘EBITDAR’ is defined as earnings before interest, tax, depreciation, amortisation and rent. EBITDAR uses operating profit as the underlying earnings. In an earnings release, just prior to the financial year end, the directors disclosed that EBITDAR had improved by $180 million because of the cost savings associated with the acquisition of an entity six months earlier. The directors discussed EBITDAR at length describing it as ‘record performance’ but did not disclose any comparable information under IFRS Standards and there was no reconciliation to any measure under IFRS Standards. In previous years, rent had been deducted from the earnings figure to arrive at this APM.

(iv) The directors have not taken any tax effects into account in calculating the remaining APMs.

Required:

Advise the directors whether the above APMs would achieve fair presentation in the financial statements. (10 marks)