The use of alternative earnings per share in the Annual Reports of European listed companies since the 2005 introduction of IFRS

The introduction of IFRS in 2005 for European publicly listed companies was intended as a step towards the increase in comparability of financial statements between companies, sectors and countries. As such, IFRS permits the use of additional information in the financial statements if it facilitates the user's understanding of the preparer's financial position. Such additional information includes Alternative Performance Measures (APMs). The damage to market confidence following the accounting scandals in the United States has no doubt influenced the debate on the use and usefulness of APMs in Europe. European bodies such as CESR have attempted to address this debate by providing their opinion and recommendations for the use of APMs, with the essential view towards protecting the nonprofessional investor from being mislead by the use of APMs.
The main objective of this study is to determine the nature and extent of presentation of alternative Earnings Per Share (EPS) figures in the financial statements and annual reports of a selection of European listed companies, towards an understanding of the motives for using APMs. Three research questions were posed namely: (1) Has the number of companies reporting an alternative EPS figure increased over the three reporting years since the 2005 introduction of IFRS? (2) What alternative EPS terms are being used and how are they presented in the annual report and financial statements? (3) On average, are alternative EPS prices higher/lower than GAAP EPS prices and does this factor influence the frequency of presentation?
In this study, the annual reports of 31 European listed companies were analyzed for the years 2005, 2006 and 2007. The results show a steady rise in companies reporting alternative EPS from 2005 to 2007. The majority of alternative EPS terms used were such generic terms as «Adjusted EPS» and «Underlying EPS» behind which the variety and type (income-increasing or decreasing) of exclusions was vast. In line with previous research, the results indicate that the total primary alternative EPS prices disclosed tend to be higher than the GAAP EPS price. Interestingly though, when companies report a second or third alternative EPS measure, most presentations show a lower-than-GAAP alternative EPS price. Further, the research results indicate
that companies prefer to present first in the document the measure that portrays a better performance.