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SGX warns against use of 'earnings before coronavirus' metric

Regulator stresses that alternative performance measures should not be used to flatter results

The SGX joins other regulators such as the European Securities and Markets Authority and the UK's Financial Reporting Council in calling for caution against Ebitdac adjustments.


ISSUERS here should not use what is now widely known as Ebitdac (earnings before interest, taxes, depreciation, amortisation and coronavirus) in their interim financial reports, said Singapore's frontline market regulator, calling this hypothetical measure "unreliable" and one that presents a "misleading picture" of financial performance to investors.

"SGX RegCo cautions issuers against presenting such a hypothetical APM that attempts to recast earnings as if the effects of the pandemic had not occurred," said the Singapore Exchange Regulation (SGX RegCo) in a regulator's column published on Monday.

The regulator stressed that alternative performance measures (APMs) should not be used by issuers to flatter their results, or to avoid presenting a less favourable view of their performance.

The warning follows reports that a growing number of issuers overseas are using Ebitdac to "add back" profits that they might have made if not for the novel coronavirus. Some of these issuers have also used the hypothetical Ebitdac figure to argue that their allowable debt capacity should be higher.

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While APMs such as Ebit, Ebitda and free cash flows can be useful to investors when read alongside other information that is provided under the accounting standards, issuers must ensure that APMs do not mislead investors, SGX RegCo said.

If used, APMs must be presented consistently between periods with clear explanations on how they are calculated.

The SGX joins other regulators such as the European Securities and Markets Authority and the UK's Financial Reporting Council in calling for caution against Ebitdac adjustments.

Ratings agencies have also rejected the practice of using Ebitdac.

Fitch Ratings warned last month: "Substituting the current year's earnings with those of the previous year is another way that some companies are presenting 'before coronavirus' earnings...Although investors may be accustomed to various Ebitda add-backs...the concept of excluding such a significant market-wide disruption with an as-yet-unknown duration and long-term economic impact is novel."

In Monday's regulator's column, the SGX laid out its expectations of financial reports amid Covid-19.

"Issuers must eschew boilerplate disclosures, such as broad or generic statements that Covid-19 has negatively impacted the valuation measurements, without elaborating on the effects on each business segment," it said.

"Disclosures must also be balanced and fair and avoid omission of important unfavourable facts. Deterioration of financial performance that existed prior to the pandemic should clearly be disclosed as such and not characterised as Covid-19 related if this is untrue."

The regulator acknowledged the "present challenges" faced by issuers in making significant judgements and estimates on asset valuation, but said issuers should rely on the best available information in making "well-reasoned and supported" judgements and estimates.

"Boards should use best endeavours to ensure that the fair value of assets is not overstated, and engage management closely and question the appropriateness of key assumptions made in asset valuations. In the rare circumstances that the board is unable to quantify the impact to asset valuation, it should clearly explain why."

Under current listing rules, issuers must have their boards confirm that nothing has come to their attention that may render the interim financial statements to be false or misleading in any material aspect. This must continue to be done "without any attempt to carve out caveats or exceptions", said the regulator.

"While this may be difficult under current conditions, it is precisely in these circumstances that investors need reliable financial information to make informed investment decisions."

In a joint media statement with SGX RegCo, Singapore's Accounting and Corporate Regulatory Authority (Acra) said that issuers are "strongly encouraged" to refer to a guidance published by Acra in May.

It set out what directors should question management and statutory auditors on, so that they can adequately assess the impact from Covid-19 on companies' financials.

SGX RegCo will continue to review if further enhancements to the listing rules should be made to strengthen disclosures, it said.

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