Performance-measures

Hyperscaler depreciation: Real issue, wrong debate

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Successive extensions to the estimated useful lives of data centre equipment have prompted claims that hyperscaler profits are being flattered. One prominent critic describes the practice as one of the “common frauds of the modern era” and estimates that industry depreciation will be understated by $176bn over three years.

We are not persuaded that the useful-life estimates are unreasonable. In our view, the real challenges for investors are the absence of required fixed asset componentisation under US GAAP and the prospective treatment of changes in estimates. Both can affect the usefulness of depreciation as a component of performance and as a guide to future capital spending.

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Equity accounting gains and losses investors should ignore

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In 2025 Renault reported a net loss of €10.9bn, of which €9.3bn arose from a change in the accounting for its investment in Nissan. However, no shares were sold and nothing happened in 2025 to the value of the stake to justify a loss of this size.

The charge results from reclassifying Nissan from an associate, measured using the equity method, to a financial asset measured at fair value. A similar accounting construct, this time a gain, appears in Microsoft’s 2026 results, arising from dilution of its stake in OpenAI. Both reveal, in our view, the deficiencies of equity accounting.

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Equity analysis when accounting and economics diverge

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Analysis becomes more difficult for investors if financial statements fail to faithfully represent the underlying economics of a business. Sometimes this reflects the limitations of accounting; however, sometimes the accounting is simply misleading – for example, US GAAP accounting for loan losses.

The FASB has recently issued an amendment to US GAAP to correct an anomaly where an accounting loss is recognised when loans are acquired, even though no economic loss has occurred. We explain why accounting and economic reality can diverge, and how the US GAAP amendment will help investors.

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Pension accounting: When investors should adjust the data

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Comparability of financial statement data is vital for investors. Although the widespread adoption of IFRS and past convergence of IFRS with US GAAP has greatly improved comparability, significant challenges remain – pension accounting being a prime example.

Many companies in the automotive sector have significant pension liabilities. Global comparison of these stocks, and even comparison of just the US GAAP reporters, often requires substantial adjustments. We explain the accounting, the lack of comparability, and what investors can do about it.

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Managing earnings volatility: Non-GAAP versus OCI

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The remeasurement of financial assets and liabilities to current value can be a source of significant earnings volatility. Many companies mitigate this by presenting an adjusted (non-GAAP) performance metric or by reporting some gains and losses in other comprehensive income (OCI).

The insurance sector, and the recently introduced IFRS 17, provides a good example of the communication challenge arising from volatile markets. IFRS reporters are split, largely along geographical lines, between applying the OCI option in IFRS 17 and a non-GAAP approach. Both approaches present challenges for investors.

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IFRS 17 insurance: Economic versus accounting volatility

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Economic and accounting volatility for insurance companies arises from changes to estimates of fulfilment cash flows and from changes to financial markets that impact asset values and the discount rate used to measure insurance liabilities.

We explain the different sources of economic volatility for insurance companies, how these are reflected in financial statements, and why accounting volatility may not always equal economic volatility. Some economic volatility is deferred and smoothed in financial statements, and some accounting volatility may not actually be economic gains and losses at all.

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Stock-based compensation: Transparency, timing and EPS

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Stock-based compensation can be difficult. Two approaches to measurement, valuation uncertainty, frequent adjustments for changes in estimates (including sometimes the stock price), and a dilutive effect in addition to an expense, all contribute this being a topic many investors try their best to avoid.

Investors are not helped by inadequate stock-based compensation disclosures. Some companies go further than required by accounting standards, such as Swiss bank UBS, whose helpful additional analysis gives more transparency. However, this analysis raises interesting questions about the timing of the expense and the impact on diluted EPS.

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Commodity price risks: Volatility, hedging and ‘own-use’

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The mark-to-market of commodity supply contracts, such as power purchase agreements and related derivatives, can create significant volatility in profit and loss. But are these gains and losses meaningful, and should you remove them from performance measures as many companies do in their non-GAAP reporting?

There are 4 methods of accounting for power purchase agreements and, confusingly, you could find all of them applied by one company. We explain how each method works, when fair value gains and losses arise, the implications for your analysis, and how all this will be affected by a recent change to IFRS 9.

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Relative valuation conflicts – EV/EBITDA versus P/E

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There is usually at least one metric that gives valuation-based support for an investment, even if this is contradicted by other indicators of relative or absolute value. You may have heard comments such as “… but it looks cheap on EV/EBITDA” to help justify a particular investment recommendation.

We examine why different multiples can give conflicting indications of relative value. For example, food-on-the-go stock Greggs trades at a 35% discount to rival Dominos Pizza, based on EV/EBITDA, but at a 24% premium using a price earnings ratio. Which multiple (if either) gives the correct relative valuation?

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Insurance company profit and the illiquidity premium

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The profit of insurance companies that report under IFRS is affected by three rates of return – the liability pricing rate, the return from investments, and the IFRS 17 discount rate. The first two largely determine the magnitude of aggregate profit; the last mainly affects the timing of profit recognition and its classification as a service result or net financial result.

We use an interactive model to explain how interest rates determine the reported results of insurance companies. The illiquidity component of the IFRS 17 discount rate is subjective, likely to vary by company, and plays a key role in how insurance companies are valued.

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Cash is king – except when analysing performance

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We often see investors using cash flow metrics, particularly cash from operations, as a measure of performance. Cash flow may even be preferred to profit because it is supposedly more reliable and less subject to management judgement and potential manipulation … “cash is a fact, but profit is an opinion”.

We explain why cash flow may not provide the insights into performance that some investors expect, and how cash flow can often be managed even more freely than profit. Cash flow is nevertheless an important component of equity analysis and ‘following the cash’ is vital to understanding a business.

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Analysing complex capital structures – perpetual bonds

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Many companies look beyond straight debt and ordinary shares when raising finance, with capital structures increasingly including an array of complex financial instruments. This presents challenges for investors, particularly when analysing performance and leverage.

We investigate the effects of one form of ‘hybrid’ financing – perpetual super-subordinated bonds – where securities with debt-like features may be reported as equity in financial statements. Recent proposals by the IASB to improve transparency in reporting these instruments and other complex capital structures will help investors.

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Why IFRS 18 is good news for investors

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The IASB has issued its new international standard for the presentation of financial statements – IFRS 18. Changes that will benefit investors include a prescribed operating-investing-financing structure for the income statement, new defined subtotals, additional disaggregation, and a more relevant cash flow presentation.

IFRS 18 will better align financial reporting with equity analysis and provide additional and more comparable data to facilitate that analysis, including data that should help investors to forecast performance and assess risk.

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Expected credit losses: Beware the day 2 effect

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Following the 2008 financial crisis, loan loss provisioning was changed to reflect ‘expected’ losses rather than ‘incurred’ losses. This made the impairment reserves of banks more responsive to changes in credit quality, but it also introduced a potentially confusing day 2 effect.

Under US GAAP most expected loan losses are charged to profit up front. This ‘prudent’ approach may be liked by banking regulators, but it can produce performance metrics that are difficult to understand. The effect is greatest for growing loan portfolios, particularly following acquisitions, as illustrated by the Citizens Bank purchase of Silicon Valley Bank.   

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Negative goodwill may not mean a bargain purchase

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Acquisitions of struggling banks are producing record profits due to negative goodwill ‘bargain purchase gains’. The Q1 2023 earnings of Citizens Bank was $9,504m compared with $264m in the same period last year, largely due to its Silicon Valley Bank deal.

Negative goodwill arising from business combinations is reported as an immediate profit under both IFRS and US GAAP; but does it really represent an increase in shareholder value? We explain the meaning of negative goodwill, its relevance for investors and why we think (at best) only part should be recognised as a profit.

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M&A accounting: Puzzling gains and counterintuitive cashflows

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Companies are continuously reshuffling their business portfolio by either spinning off assets (GlaxoSmithKline, Vivendi) or increasing their share in existing businesses (BMW, Siemens Energy). However, the M&A accounting applied to these transactions can produce some unusual and potentially confusing effects.

In 2022, German luxury car manufacturer BMW increased its stake in its Chinese joint venture BMW Brilliance from 50% to 75%. Surprisingly, this produced a gain in profit and loss (even though nothing had been sold), a cash inflow (even though BMW paid cash for the additional investment), and recognition of an asset that BMW already owned.

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Fair values and interest rate risk – Silicon Valley Bank

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Losses caused by the rise in interest rates in 2022, coupled with inadequate interest rate risk management, appear to be the trigger for the collapse of Silicon Valley Bank. However, most of the losses on its fixed rate assets were not recognised in either the balance sheet or in profit and loss.

We discuss why investors may have thought the bank was better hedged against interest rate risk than turned out to be the case, and show how 2022 profit would have been very different when measured on a full fair value basis – we estimate a pre-tax loss of $14.4bn rather than a US GAAP reported profit of $2.2bn.

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Associate impairments may not reflect underlying economics

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Assets measured at cost are subject to impairment testing and potential write-down if there has been a decline in value. However, unclear impairment indicators, subjective measurement and the ability to use so-called value-in-use may mean that accounting impairments do not equal the change in economic value. 

We discuss the impairment process for investments in associated companies that are subject to equity accounting. In the case of French media company Vivendi’s investment in Telecom Italia, a cumulative impairment loss of €1,974m has been recognised since 2015. However, the 2021 balance sheet value still exceeded the market value of the investment by €812m.

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EPS growth: Demergers and special dividends

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Differences in adjustments to the share count related to special dividends and demergers can impair the comparability of earnings per share. Under IFRS, EPS growth depends on whether a stock consolidation accompanies a distribution. However, stock consolidations, by themselves, have no economic impact and should not affect performance metrics.

In Vivendi’s recent distribution of shares in Universal Media Group, the lack of an accompanying stock consolidation resulted in a discontinuity in per share metrics. However, in a similar distribution by GSK, a stock consolidation produced a very different outcome. We explain the problem for investors and how you can adjust to ensure comparability.

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Do not use non-GAAP metrics in equity valuation

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A forecast of profit is used for both valuation multiples and as a starting point in deriving free cash flow for DCF valuations. But should you use a forecast of the reported IFRS or GAAP measure, or a forecast of the adjusted non-IFRS or non-GAAP alternative performance measure (APM) presented by management? 

We think equity valuations should be based on forecasts of reported IFRS or GAAP earnings (albeit with some adjustment related to intangible assets). Forecasts of management APMs can be useful for understanding trends in performance but using these in equity valuation is likely to introduce a structural bias.

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IFRS 17 Insurance – More comparability and new insights

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IFRS 17 will result in significant changes to insurance company financial statements as of next year. Benefits for investors include a more relevant top line, consistent profit recognition, source of earnings analysis, updated assumptions, value of new business disclosures and an end to confusing asset-based discount rates.

We think IFRS 17 will make insurance financial statements accessible to the broader investment community rather than just insurance specialists. However, compromises and options in the new standard, such as the option to use OCI, will make analysing the new information not as straightforward as we might hope.

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EBITDA-AL: More letters but no more insight

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In the alphabet soup of investment metrics, a new variant on EBITDA has appeared in some IFRS based company presentations – EBITDA-AL, with the ‘AL’ meaning ‘after leases’. But does the new measure make any sense? And why use EBITDA-AL rather than the established EBITDA or EBITDAR?

All ‘earnings-before’ measures create comparability issues, omit key components of operating performance, and should be interpreted with caution. We think EBITDA-AL is worse than EBITDA, which never was that useful in the first place. Better to use EBIT, EBITA or EBITDA-AMCE, where maintenance capital expenditure replaces D&A.

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Non-controlling interest and NCI put options

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Although accounting for non-controlling interest (NCI) is generally relatively straightforward, including it in equity valuation is more challenging. The reverse is true for NCI that is subject to a put option. In this case the accounting is complex, with different and potentially inconsistent classification and measurement, but useful additional data is available for valuation.

We discuss the accounting and valuation implications of non-controlling interests and use the put option written by LVMH over the non-controlling interest in its subsidiary Moët Hennessy to illustrate the challenges and opportunities for investors.

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Pension leverage under IFRS and US GAAP

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US GAAP and IFRS present the effects of pension leverage differently in financial statements, notably leverage arising from pension fund asset allocation. This complicates the comparison and interpretation of performance measures and valuation multiples.

We use Delta Air Lines to illustrate the positive impact of the US GAAP ‘expected return’ approach on reported profit, including the effect of optimistic return assumptions. If Delta had applied the IFRS ‘net interest’ approach we estimate that a ‘gain’ of $594m would have been excluded from profit and loss and instead reported in OCI.

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Disaggregation is key to understanding performance

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Limited disaggregation of income and expense items with different characteristics impairs investors’ ability to assess and forecast performance. Recent proposals by the IASB for a new disaggregation principle and related disclosures of ‘unusual’ items will help. However, in our view, they do not go far enough.

The IASB also proposes to include management alternative performance measures (non-GAAP or non-IFRS) within audited financial statements. We welcome this. Additional subtotals can be helpful if they are clearly described and what is omitted is clearly identified. What would also help is to ban the use of labels such as ‘underlying’, ‘core’ and ‘recurring’.

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Operating profit – improved presentation coming soon

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Most investors make extensive use of operating profit to assess company performance and as a starting point for valuation. But operating profit, like many company-provided subtotals, is not defined by IFRS; it is largely up to companies to decide what subtotals to include and even what to call them. However, the IASB may soon bring an end to this operating profit ‘free for all’.

The proposal will lead to significant changes to the presentation of financial statements, notably the income statement, and end the current diversity in presentation of income from associates and joint ventures. We examine some of the changes and the impact on financial analysis and valuation methods.

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Goodwill impairments may not identify impaired goodwill

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Failed acquisitions do not always result in goodwill impairments. Management optimism is part of the problem, but so is application of the impairment test in a way that maximises the shielding effect of other assets. This reduces the value of goodwill impairments for investors.

Analysing the success or failure of M&A is important to assess management stewardship. We applaud the IASB’s proposal for more disclosure, but also believe the goodwill impairment test needs a critical review. Some use the ‘too little, too late’ character of impairment to advocate re-introducing goodwill amortisation. We do not agree.

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Don’t rely on APMs, disaggregate IFRS

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Alternative performance measures (APMs) can be helpful for investors, but not necessarily the figure itself. It is the disaggregation of performance that is the real benefit. Focusing solely on adjusted measures means you will miss important aspects of profitability.

We explain how you can use APMs to better understand performance, but without missing key elements. In our view this approach would provide a better basis for investor forecasts, as we demonstrate by disaggregating the IFRS earnings of GlaxoSmithKline.

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Should you ignore intangible amortisation? – AstraZeneca

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Like many companies, AstraZeneca excludes intangible asset amortisation from its adjusted performance metrics. The stock currently trades at a price earnings ratio of 23x based on ‘core’ 2018 earnings, but without the add back the PE would be about 37x. Is the add back justified? And if so do companies add back the right amount?

The intangible amortisation problem in equity analysis arises from the inconsistency between the accounting for purchased and self-developed intangible assets. We argue that the accounting treatment of subsequent expenditure, either capitalised or expensed, determines the appropriate adjustment to reported earnings.

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Deferred tax fails to reflect economic value – Vodafone

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Most deferred tax adjustments in financial statements help investors – but not always. The ‘economic value’ of deferred tax assets arising from unused tax losses may be significantly less than the balance sheet figure. However, as a consequence, profit forecasts may be understated, potentially leading to an undervaluation by investors. 

We estimate that if the £24bn deferred tax asset of Vodafone were discounted to an economic value then it would instead be closer to £8bn, but forecast profit would rise by about £500m.

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