The Impact of the FMA Guidance Note on Non-GAAP earnings disclosures

Abstract

PURPOSE: It is common practice for companies to disclose earnings measures and other financial information, which is not prepared in accordance with generally accepted accounting practice such as (referred to as non-GAAP earnings and non-GAAP financial information). The New Zealand Financial Markets Authority (FMA) introduced a Guidance Note in 2012 to improve disclosure of non-GAAP information. This study investigates the effect of those guidelines on the number of New Zealand listed companies reporting non-GAAP earnings and the quality of non-GAAP earnings information disclosed.

DESIGN/METHODOLOGY/APPROACH: A disclosure and prominence index are created to measure any change in company’s compliance with the FMA guidance on the presentation of non-GAAP information and the level of prominence given to non-GAAP earnings.

FINDINGS The findings show that the guidelines, despite not being mandatory, are modifying corporate disclosure behaviour. Companies have improved the way they disclose non-GAAP earnings information and there has been a reduction in the emphasis given to non-GAAP earnings as opposed to audited statutory profit. However, the study also highlights areas for improvement, including the depth of explanation of non-GAAP earnings calculations and adjustments, and concern about multiple nonGAAP earnings measures used to explain performance.

ORIGINALITY/VALUE There has been no academic research on the impact of the FMA Guidance Note on company disclosure practice. This study contributes to the developing research on non-GAAP earnings by extending the research to a small country with different institutional and market features and policy responses to disclosure of non-GAAP earnings