The IASB is trying to make the information conveyed in company financial statements more relevant and useful, including by reducing the use of unofficial financial metrics. One idea the board explored — and ultimately rejected — was requiring all companies to report one of the most widely used non-GAAP measures: Earnings Before Interest Tax Depreciation and Amortization (EBITDA).
It is one of the most common non-standardized financial measures, but the IASB does not have the appetite to require companies to use it.
After months of researching the issue, the international board on November 14, 2018, decided companies would not have to report Earnings Before Interest Tax Depreciation and Amortization, often referred to as “EBITDA,” in either their statements of financial performance or in their financial statement footnotes.
“EBITDA sort of has been the work of the devil by certain stakeholders,” said IASB member Nick Anderson, referring to the subtotal sometimes being dubbed “earnings before bad stuff.”
“We should not require it as a subtotal,” Anderson said. Thirteen of the board’s 14 members agreed; IASB member Chungwoo Suh was absent.
Companies use EBITDA or a version of EBITDA to capture their performance apart from some of their financial and tax obligations. The board had been mulling whether to standardize the oft-used metric and included the idea in the initial stages of its wide-ranging performance reporting project.
But not all companies use EBITDA. In addition, critics worried about the idea of elevating the prominence of EBITDA when it does not help investors and securities analysts assess a company’s debt service capabilities; it does not take into account cash needed for capital expenditures, some groups told the IASB’s research staff. It also is not a good proxy for operating cash flows, according to IASB research.
“I don’t think all entities would be interested in doing an EBITDA subtotal,” IASB member Ann Tarca said.
The November 14 discussion was part of the IASB’s wider effort to improve how companies present their financial performance. The IASB also is considering changes to the cash flow statement as well as requiring that companies present a management operating performance measure, a subtotal that would aim to convey more information about how a business’s managers assess the financial health of their company. Currently, many companies present such a subtotal labeled as operating profit, core operating profit, or underlying operating profit.
The end goal of the project is to make financial statements from company to company more easily comparable, particularly amidst the rising use of non-GAAP or non-IFRS official metrics. Because EBITDA is so widely used, the IASB heard calls from some corners to both require it and define it to make it standardized.
The board on November 14 agreed that it would do more research to come up with a description or definition of EBITDA.
While the acronym “EBITDA” spells out what the measure is supposed to be, IASB members said this definition was not clear enough. They said they wanted the board’s research staff to come up with a definition that would be based on operating profit adjusted for the effect of depreciation and amortization.
“If we literally take what the letters mean, it can’t possibly fit into our [profit and loss statement] structure,” Anderson said.
In addition, the board said it would develop examples to illustrate what the IASB wants in the broad financial performance project when it issues a proposal for public comment. The board plans to develop examples of the statement of financial performance for different types of industries, a cash flow statement for a bank and a non-financial business, and any footnotes that could be introduced or changed if the IASB finalizes the project.