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One Company, Two Results – Which One Is True?

Many Finnish listed companies present investors with two results: the official result which is in accordance with the International Financial Reporting Standards (IFRS), and for example the comparable operating profit. Which result is true?

Joanna Sinclair, 14.09.2021



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Jari Melgin, Professor of Practice in Accounting at Aalto University, has a strong view on the matter: “Investors should rely on reported IFRS operating results”.

Companies often disclose adjusted measures alongside IFRS results. This is problematic because there is no uniform regulation for reporting outside the realm of IFRS – which leads to miscellaneous practices. A company may publish for instance its comparable operating profit, non-IFRS result, or adjusted operating profit.

To make matters worse, companies can decide for themselves what they include in these adjusted measures and how they name different items. The erratic practices complicate things for investors.

In 77% of the reports we looked at, the comparable results were better than the official IFRS figures."

Together with Assistant Professor Henry Jarva, Melgin examined the financial statements of 29 large Finnish listed companies for the years 2012–2018. The vast majority – 84% – published comparable results alongside their official IFRS results.

“It should come as no surprise that in 77% of the reports we looked at, the comparable results were better than the official IFRS figures,” Melgin says.

The comparable results are often highlighted in profit guidance and corporate communication. In step, the media and analysts also often comment on these adjusted measures.

“On a surface level, reporting items affecting comparability is simply good investor communication. The problem is that companies tend to report expenses more often than income as items hindering comparability,” he adds.

“Offering official and alternative figures to investors makes interpretations challenging. Does anyone know how companies are really doing?” Melgin ponders.

All losses are real

The financial statements examined by Melgin and Jarva often explained the adjusted measures through restructuring provisions, asset write-downs and depreciation of intangible assets in connection with acquisitions – but some companies also included for example legal and environmental costs.

“Companies don't think the IFRS results give the right picture, so they complement them with their own story: if nothing unusual had happened, then our result would be like this,” Melgin remarks.

“Yet all losses are real for the owners of the company, no matter if they are occasional, one-off, or otherwise outside of normal business,” he reminds.

Even if companies sincerely intend to give the most truthful picture of their result, assessments are always subjective.

“The funny thing is that when something bad happens, it is often perceived as an unusual event. Positive things, on the other hand, are usually seen as normal occurrences,” Melgin says.

“This has led to the current situation, where the market is at a loss about how to calculate profitability and what to trust: official figures or these extra figures that no one can verify, because they lack a common ground,” he affirms.

According to Melgin, it is good to keep in mind that corporate valuation is often actually closer to art than science.

“Corporate valuation often uses complex mathematical models, which can easily give the impression that we are now talking about facts – creating an illusion of exactness,” he says.

“But precision is always a delusion in corporate valuations. There is no such thing as absolute certainty of a company’s value,” he points out.

A vote of no confidence to the existing system

Melgin reminds that accounting is an agreement. Investors would have a hard time making decisions if all companies reported in different ways. In the EU, listed companies have used the International Financial Reporting Standards in their financial reporting since 2005.

“The IFRS is a regulatory framework with very good intentions. It attempts to make comparisons between the results of different companies easier. It should also decrease costs and make information processing simpler, because everyone can trust the same numbers,” he says.

Melgin emphasizes that the IFRS is an evolving and changing set of regulations, that has both improved considerably over the years and also led to certain side-effects, like investors pondering over which results to believe.

The more comparable information companies publish, the harder it is for investors and financiers to compare companies in the same industry to one another."

“It is currently rather the norm than the exception to have companies presenting investors with two sets of figures. Yet the more comparable information companies publish in addition to IFRS results, the harder it is for investors and financiers to compare companies in the same industry to one another,” he continues.

Wanting to give the best possible picture is understandable – and from the point of view of corporate management, results that have been swept clean from random and one-off losses may seem to better reflect the operations than figures in the official statement.

“In general, however, presenting two sets of results is a vote of no confidence to the current standards,” Melgin notes.

“To my students at Aalto University, I always underline that they should trust the IFRS measures. I strongly recommend that investors and financiers do the same. The IFRS operating profit is the true operating profit,” he concludes. 

Jari Melgin is a faculty member in Aalto EE and Aalto PRO programs. In addition, Finva offers versatile financial training for banking, insurance, and financial professionals as well as other actors who need financial expertise.

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