Management performance measures that do not backfire under IFRS 18

IFRS 18 will tighten how companies present performance in the financial statements. One of the most useful angles for SBR ACCA is management performance measures. They can help users understand the business, but they can also damage trust if they look like profit smoothing or selective storytelling.

This post shows how to handle management performance measures under IFRS 18 in a clean, exam-ready way. You will learn what to write, what to avoid, and how to build a short reconciliation that feels credible. If you want a wider base plan for writing strong SBR scripts, start with ACCA SBR and apply the structure in every timed practice.

What IFRS 18 is trying to fix

Investors and lenders often compare operating profit and other subtotals across companies. The problem is that many companies have used customised performance lines that look like IFRS subtotals but are not. They remove costs that feel inconvenient and keep gains that help the narrative. Over time, users stop trusting the headline numbers.

IFRS 18 aims to improve comparability and reduce confusion by:

• defining clearer categories and subtotals in profit or loss
• forcing transparency when management uses performance measures outside IFRS totals
• improving disclosure so users can see how an adjusted measure is built and why it exists

This is a current issue that SBR examiners can test easily. It also rewards clear writing because the technical knowledge is not the hard part. The hard part is explaining and applying it.

What a management performance measure is in plain English

A management performance measure is a number management uses to explain performance, but it is not a required IFRS subtotal. Most people call them “adjusted” measures. Examples include:

• adjusted operating profit
• underlying EBITDA
• profit before exceptional items
• adjusted earnings per share

The key exam point is not the label. The key point is whether the measure is:

• clearly defined
• used consistently
• reconciled to IFRS subtotals
• supported by logic that helps users

If you can show these points in an answer, you will score well.

Why these measures can backfire

Management performance measures backfire when users think the company is hiding something. This is not only a reputation issue. It becomes a governance issue. It can affect financing terms, investor confidence, and audit committee oversight.

Here are common reasons they backfire:

• the company removes recurring costs every year and still calls them one-off
• the definition changes whenever results are weak
• the measure is given more prominence than IFRS subtotals
• the reconciliation is unclear or buried
• the adjustments do not match the company’s story elsewhere in the report

In SBR, you do not need to use dramatic language. You simply state that a measure can mislead users if it is not transparent, consistent, and reconciled.

The exam structure that makes this easy to write

Use Issue – Rule – Apply – Conclude.

This stops you waffling and helps professional marks.

Issue
Management wants to present an adjusted measure, and there is a risk users misread performance.

Rule
IFRS 18 improves discipline around subtotals and requires transparent treatment of management measures, including clear definitions and reconciliations to IFRS numbers.

Apply
Explain whether the measure is useful, whether adjustments are valid, and how to present and reconcile it so it does not mislead.

Conclude
Recommend a clear approach that supports comparability and trust.

This structure reads like an audit committee briefing, which is exactly the tone SBR often rewards.

The rule of three for adjustments

When you see an adjusted measure, test it with the rule of three. If it fails these tests, it is likely to backfire.

1. Is the adjustment genuinely unusual in nature or frequency
2. Is it consistent with the business model and the story in the report
3. Can it be explained in one clear sentence that a user would accept

If you cannot explain an adjustment without excuses, remove it. If the company insists on keeping it, the disclosure must be strong and the reconciliation must be clear.

A clean reconciliation that does not invite criticism

A good reconciliation is simple. It starts with an IFRS subtotal and ends with the adjusted measure. It uses short labels and avoids vague buckets.

You do not need a long table in an exam answer. You can describe it in words, or outline the key line items in a short paragraph.

A clean reconciliation should:

• start from operating profit or profit before tax, not from a bespoke line
• list adjustments separately, not combined into “other”
• explain each adjustment briefly
• keep the adjustment definitions stable over time

If you want a structured approach for SBR practice with marking and mock debriefs, consider a guided ACCA SBR course and use this approach in your submissions.

Mini scenario 1 adjusted operating profit

Scenario
A retailer reports adjusted operating profit that removes store closure costs and staff redundancy costs. It has reported similar “one-off” costs in three of the last four years.

High scoring answer points

Issue
The adjusted measure may mislead because the adjustments appear recurring.

Rule
IFRS 18 increases discipline over subtotals and requires transparent use of management measures with clear reconciliation and explanation.

Apply
If store closures and redundancies are part of the normal cycle of the business, removing them each year creates an overly positive picture. The company should either stop removing them or explain why they are exceptional with clear evidence. If management keeps an adjusted measure, it should define it consistently, reconcile it to IFRS operating profit, and avoid giving it more prominence than IFRS subtotals.

Conclude
Present IFRS operating profit as the primary subtotal, use a clear reconciliation for any adjusted measure, and remove recurring adjustments that reduce comparability.

This style earns marks because it is calm, practical, and linked to user needs.

Mini scenario 2 an adjusted measure linked to a one-off incident

Scenario
A manufacturer had a warehouse fire. It reports adjusted operating profit excluding the fire loss. The loss is large and unlikely to recur.

This is where adjusted measures can be helpful.

A strong answer says:

• it is reasonable to disclose the impact of the fire separately because it is unusual in nature and size
• IFRS subtotals should still be shown clearly
• the adjusted measure should be reconciled to IFRS operating profit
• the note disclosure should explain the nature and effect
• the company should not use the measure to hide other routine costs

Notice the balance. You are not anti-adjusted measures. You are pro clarity.

The most common trap in SBR scripts on this topic

The common trap is writing as if the only issue is presentation. It is not. The bigger issue is trust.

In an exam, you can show that you understand this by stating:

• the measure must be fair, clear, and not misleading
• the audit committee should oversee the definition and prominence
• the company should keep the definition stable across periods
• the reconciliation should be easy for users to follow

These are professional marks points. They are also the points that separate strong candidates from average ones.

How audit committees and boards should control these measures

An SBR requirement might ask you to advise an audit committee. That is your chance to sound like a professional adviser.

A strong answer includes practical governance steps such as:

• agree a written definition of each management performance measure
• approve which adjustments are allowed and why
• require a consistent reconciliation format each year
• review whether adjustments are recurring and whether users might be misled
• ensure IFRS subtotals remain primary in the financial statements

Do not overcomplicate it. You can write this in a tight paragraph and score well.

When adjusted measures create an ethics issue

Adjusted measures become an ethics issue when they are used to manipulate perception.

In exam terms, this can happen when:

• management pressures the finance team to exclude bad news
• “exceptional” becomes a label applied to anything inconvenient
• the company uses multiple different adjusted measures depending on audience
• definitions change without disclosure

You do not need to accuse management of wrongdoing in an exam answer. You can say the approach increases the risk of misleading users and undermines trust, so stronger governance and disclosure is required.

That calm tone is often what markers want.

Linking IFRS 18 to other SBR topics without drifting

A good SBR script shows connectivity. But you must keep it short. Use one or two links, then return to the requirement.

Here are safe links:

• If the adjusted measure removes impairment, you can say impairment is often driven by cash flow forecasts and judgement. Removing it can mislead if the impairment reflects ongoing economic reality. Better disclosure is needed.
• If the adjusted measure removes hedging gains or losses, you can say users need consistency between risk management narrative and financial instrument disclosure. Selective removal can confuse performance trends.
• If the measure is used in a group context, you can say the company should ensure the measure is consistent across segments and does not hide weak performance by aggregation.

Keep links short. The marks are in applied writing and conclusions.

A practical checklist for writing this answer under time pressure

This is the only bullet list in the post. Use it as your exam plan when you see an IFRS 18 performance measure requirement.

• State whether the adjusted measure is likely to help users or mislead them
• Identify which adjustments look recurring or judgemental
• Recommend that IFRS subtotals remain primary and the measure is clearly labelled as management-defined
• Explain that a reconciliation is required and should be clear and consistent
• Add one governance point for audit committee oversight and consistency across periods
• Conclude with a direct recommendation on presentation and disclosure

If you cover those points, you will usually score well.

How to practise this topic in 30 minutes

You do not need long study sessions to get good at this.

Pick a question where management reports an “adjusted” result. Then do:

1. Write a 12 minute answer advising the audit committee on whether the measure is acceptable.
2. Write an 8 minute paragraph describing what the reconciliation should show.
3. Rewrite your weakest paragraph into 8 to 10 lines using Issue – Rule – Apply – Conclude.

Do this twice and your answers will become sharper quickly.

This is also good for motivation. You can see improvement on the page, which keeps you consistent.

Resit candidates and the fastest way to improve here

If you are sitting ACCA resit exams, this topic can be a quick win. Many resit scripts fail because:

• the candidate over-writes theory
• the candidate does not conclude
• the candidate ignores professional marks

This topic fixes those habits. It forces short writing and practical recommendations.

A good resit approach is:

• practise one management measure question per week
• mark yourself for structure and conclusion
• rewrite one weak paragraph
• track whether you are finishing the paper to time

That routine often moves scores faster than another round of long notes.

What to say if you are unsure

Sometimes a question gives limited information. You can still score by writing in a conditional but practical style.

For example:

If the adjustments relate to genuinely unusual items, a management-defined measure can help users, but it must be reconciled and clearly explained. If the adjustments are recurring, the measure risks misleading users and should either be removed or presented with clear disclosure and reduced prominence.

That is balanced, realistic, and exam-friendly.

The calm conclusion you can reuse

If you need a final line for many IFRS 18 performance measure answers, use this idea:

Management performance measures can be useful, but only when they are consistent, transparent, and reconciled to IFRS subtotals. IFRS 18 expects clearer discipline around subtotals and clearer disclosure of adjustments so users can understand performance without being misled. The audit committee should approve definitions, monitor recurring adjustments, and ensure the IFRS presentation remains the primary story.

That conclusion reads like a board recommendation. It is calm. It earns marks.

What to do next

Pick one past question with an adjusted profit narrative. Use the checklist above. Write short applied points. Conclude clearly. Then rewrite the weakest paragraph.

Do that twice and this topic becomes reliable marks rather than uncertainty.