ISSN: 2543-6821 (online)

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Ewa Wanda Maruszewska,

Maciej Andrzej Tuszkiewicz

Boundaries of management
performance measures (MPMs)
disclosed in primary financial
statements prepared in accordance
with new standard planned
to supersede IAS 1
To cite this article

Maruszewska, E.W., Tuszkiewicz, M.A. (2024). Boundaries of management

performance measures (MPMs) disclosed in primary financial statements
prepared in accordance with new standard planned to supersede IAS 1.
Central European Economic Journal, 11(58), 1-16.

DOI: 10.2478/ceej-2024-0001

To link to this article: https://doi.org/10.2478/ceej-2024-0001

Open Access. © 2024 E.W. Maruszewska, M.A. Tuszkiewicz, published by Sciendo.

This work is licensed under the Creative Commons Attribution 4.0 International License.
 Ewa Wanda Maruszewska
University of Economics in Katowice, Department of Business Informatics and International
Accounting, ul. 1 Maja 50, 40-287 Katowice, Poland
corresponding author: [email protected]

Maciej Andrzej Tuszkiewicz

University of Economics in Katowice, Department of Business Informatics and International
Accounting, ul. 1 Maja 50, 40-287 Katowice, Poland

Boundaries of management performance measures (MPMs)

disclosed in primary financial statements prepared in
accordance with new standard planned to supersede IAS 1
Abstract
We outline the management performance measures (MPMs)’ boundaries based on the upcoming introduction of
MPM’s definition to International Financial Reporting Standards (IFRS). The literature investigates business performance
measures concentrating on managers’ needs, while IFRS aims to provide financial information to external users who
provide resources to the entity. This indicates a gap between how performance metrics have been investigated so far
and how IFRS will adopt them. We used analysis of the exposure draft of the planned standard together with working
materials developed in the consultation process. Further, a case study is presented. Results show that the scope of
MPM to be introduced to IFRS is limited compared to the broad spectrum of performance measures presented in
the literature. We contribute by showing the avenues for future performance measures research using signalling
and agency theory and by indicating the limited scope of MPMs and thus bound prospects for using them for a full
assessment of the entity‘s performance.

Keywords
management performance measures | MPM | performance measurement | IAS 1 | IFRS 18 | signalling theory | agency theory

JEL Codes
M00, M40, M41

1. Introduction within the scope and content of the planned IFRS 18

Presentation and Disclosure in Financial Statements
(IFRS Accounting, 2023, July). The authors were a part
In 2014, International Accounting Standards Board
of the expert groups testing and stating their opinions
(hereinafter IASB) has started a project named
on the original ED and its amended versions.
“Primary Financial Statements.” The project aims to
increase transparency and comparability of financial This article aims to outline the boundaries of the
statements, thus enhancing the relevance of the MPM based on the upcoming changes to financial
information disclosed. As a result, an exposure draft reporting. This need arises from the fact that the
was published in 2019, General Presentation and definition of MPM will be introduced by IFRS for
Disclosures ED/2019/7 (later referred to as ED), the first time in 2024 (IFRS Foundation, 26.07.2023),
which presents a standard planned to supersede IAS with an effective date in 2027. Based on the analysis
1 “Presentation of Financial Statements”. Since then, of regulations developed since 2019, the authors show
the European Financial Reporting Advisory Board the necessity for preparers of financial statements to
(EFRAG), working on developing IFRS Standards from examine the new regulations as well as the obligation
a European perspective, in parallel collects opinions for the users of financial statements to understand
and organises field tests of the ED. It led to amendments these new elements of financial statements to properly
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 3

use them in their decision-making processes. To the model, or no clear organisational structure, and
achieve the stated objective, the authors ask a research concern mainly for short-term cash flows (Bahrl et
question: What are the boundaries of MPM prepared in al., 2016). This stream of literature clearly indicates
accordance with the planned standard? This question that performance measures are mainly based on the
is essential, as performance measures (business information disclosed in the financial statements
performance measures, performance measurement but also on non-financial measures. This is because
and management systems (PMMSs), or performance performance measures must measure both financial
metrics) already exist in the theoretical and empirical and non-financial aspects of performance (Bahrl
literature. Further, qualitative characteristics of et al., 2016), like profitability, efficiency, customer
financial reports are built upon faithful representation satisfaction, or quality of services (goods produced).
and relevance; thus, MPM, being a part of IFRS, must Clever integration of financial and non-financial
comply with them, forcing managers to make well- and internal and external data builds the strength
thought-out decisions about the type of MPM that is of performance measurement used in contemporary
made public and used by the economy participants. entities. Further, performance measures should be
prepared based on the information available in the
entity (as additional collecting of data makes the
system too expensive). They should not only measure
2. Business Performance past performance but, beyond the above, guide
Measurement: Literature managers for future activities, and in addition, they
should implicitly convey the entity’s strategy (Boselie
Review et al., 2005; Van der Hauwaert et al., 2022). The above
description of performance metrics is incomplete, as
The importance of business performance measurement the literature highlights various characteristics central
in assessing the efficiency and effectiveness of to the approaches under investigation (Taticchi et al.,
an entity’s past actions is broadly emphasised in 2009), indicating a multifaceted approach to evaluating
management literature, including accounting studies an entity’s performance, aiming at complete business
(Mavropulo et al., 2021; Neely et al., 2000). Hence, it description.
is an area of constant research, both theoretical and
practical. Considerable interest in this topic began To summarise, research interest in measuring
with the criticism of business performance metrics business performance seems to adhere to the principle
used in the 1970s and 1980s (Berliner & Brimson, that when one can measure something, one possesses
1988; Chandler, 1977; Cooper & Kaplan, 1988). The knowledge about it; thus, one can improve it (Micheli
main complaint was that business performance & Mari, 2014). Sharing knowledge with those outside
measures do not provide a clear answer as to which the entity seems to be a basic premise for introducing
actions influenced which results (Taticchi et al., MPM into IFRS.
2009), and thus different performance measurement
and management models were designed like the
Du Pont Pyramid of Financial Ratios (1977), results
and determinants framework (Brignall et al., 1991), 3. Theoretical Underpinning
the performance pyramid (Lynch & Cross, 1991),
the balanced scorecard (Kaplan & Norton, 1992), For many years in the accounting literature, a great
the process-based approach (Neely et al., 2000) or deal of attention was paid to the need of market
the Cambridge performance measurement process participants for reliable and relevant information
(Neely, 2002). Further, developed measures were (Chen et al., 2021; Cutler et al., 1989; Kadous et al.,
adjusted and/or amended to the changing business 2012; Marilen et al., 2013) as well as to the accounting
environment (Kennerley & Neely, 2003). In addition, struggle for achieving it (Alexander & Archer, 2003;
the literature as a whole deals with the adjustment of Burchell et al., 1985; Hartmann et al., 2018; Lambert
designed models to the needs of small and medium et al., 2007; Macintosh, 2009; Macintosh et al., 2000;
entities that have some specific characteristics, such 7). One can say that researchers agree on the need to
as no separation of the owner from the manager, provide information about the entity’s performance
lack of formal strategy that should be included in that market participants use to make their decisions.
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 4

Signalling theory and agency theory seem to

dominate the literature cited above. Both theories
4. MPMs in the Planned
refer to managers who decide about the information Standard
provided to investors, creditors, and other uninformed
parties outside the entity. Based on signalling theory, 4.1. The Understanding and the Scope
it can be argued that managers—who have superior
knowledge, inter alia, about the entity’s future cash
of MPMs
flows—make accounting choices to reveal their The changes in financial statements upcoming in the
expectations to uninformed participants of the new standard have been divided by IASB into four
economy (Holthausen, 1990). Signals derive from an main areas:
intent to imply something in the hope that the market
(external parties) will change the company’s valuation 1) classification and presentation of operations in the
(Connelly et al., 2011). The theory was widely used over profit-and-loss statement,
the years with relation to accounting (Aljughaiman et 2) management performance measures (hereinafter
al., 2023; Gomoi & Pantea, 2016; Khan et al., 2019). MPMs),
Management performance metrics investigated in
3) classifications of operating costs by function and
the prior literature, as well as MPM in a way defined
by nature,
in the planned IFRS, provide information about the
entity’s present condition and prospects. 4) unusual incomes and expenses (EFRAG IASB
Joint Online Roundtable, 2022, November).
We also underpin our research on agency theory,
which describes the incentive problems caused by Regarding the classification and presentation
the separation of ownership and management, called of operations in the profit-and-loss statement,
the principal-agent problem (Ross, 1973). Agency the planned changes include (among others) the
theory is one of the four most used concepts within introduction of financial and investment activities
behavioural accounting (Chapman et al., 2007). It segments besides the already existing operation
results in managers’ use of discretionary accounting activities segment. It also introduces unusual incomes
choices influencing finance management, earnings and expenses and forces new presentation of operating
management (Białek-Jaworska and Dec; 2019; Harrison costs. New segmentation is important from the point
& Harrell, 1993; Jassim et al., 1988; Liang et al., 2023), of view of MPM, as new categories among profit-
and financial reporting (Ayu et al., 2020; Knoeber & and-loss segments may end up with changed or new
McKee, 1991; Maruszewska et al., 2023; Palas et al., perspectives for business performance measurement.
2023). Thus, agency theory can be used not only for
Regarding MPM, the project of the new IFRS
accounting policy choices and voluntary disclosures
states that “Management Performance Measures are
but also for obligatory disclosures in the form of,
subtotals of income and expenses not specified by
e.g., managerial commentary where managers are
IFRS Accounting Standards that are used in public
to decide about the details of data presented and the
communication outside financial statements” (ED,
form of presentation of financial information. Thus,
2019).
we argue that new MPM requirements under planned
standard can also be subject to the agency problem. Drawing from this definition, a few key points
require explanation and were already clarified in the
As both theories address similar accounting
development of the new standard process. Regarding
issues, concentrating on the provision of information
the first part of the definition, IASB proposed a graph
to those outside the entity, it should be noted that
to clarify the scope of MPMs, as per Figure 1.
agency theory pays little attention to signalling, while
signalling theory ignores the agency problem (Morris, The definition states that MPMs are subtotals of
1987), we find both theories as suitable theoretical income and expenses. That implies that only measures
background for our study. On the one hand, the resulting from the subtraction of income and expenses
planned introduction of MPM can be seen as an are within the scope of MPMs. As shown in Figure 1,
opportunity to signal positive outcomes of an entity’s the above excludes all performance metrics that are
performance. However, on the other hand, when not drawn from financial values, but also all the
negative information is revealed through MPM, it can financial indicators that are not a result of subtraction
be subject to the agency problem. of income and expenses, like return on assets,
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 5

Performance measures

Financial performance measures

Non-Financial performance
(Sub)totals of income and expenses
measures, e.g.:
Other measures, e.g.:
• Customer satisfaction,
MPMs, e.g.: • Working capital,
• H&S score, Specified by IFRS, e.g.:
• Adjusted Gross Profit, • Return on assets,
• Number of new clients. • Operating profit,
• Adjusted EBITDA, • Instant liquidity ratio.
• Profit before tax.
• Adjusted profit or loss.

Figure 1. Scope of Management Performance Measures

Source: (IFRS Accounting, 2023, July)

Subtotals of income and expenses not specified by IFRS Accounting Standards that:

Are used in public communications outside

financial statemnts
= Communicate management's view of an
aspect of an entity's financial performance

Figure 2. Rebuttable Presumption for the Definition of MPM

Source: EFRAG, 2022, September

earnings per share, or economic value added (EVA). the new standard will mandate the presentation of a
In addition, ED states that MPMs are not specified by measure communicated in public if there is reasonable
IFRS Accounting Standards, meaning that, as shown and supportable evidence that it communicates
in Figure 1, operating profit is not MPM, as it will be management’s view and is done consistently. As a result,
required per standard to present the operating profit the company could not enumerate a specific measure
on the profit-and-loss statement scheme. The second as MPM if it was used incidentally. This is important
part of the definition, “used in public communication for preparers of financial statements, but also for users
outside financial statements”, brought much of financial statements, who should be aware of this
discussion, as there was confusion about whether any fact to differentiate MPMs from other performance
verbal communication or any statement placed on information that does not meet strict requirements
social media would automatically incline to include a reducing, e.g., subjectivity. Once management decides
specific measure to MPM if it meets the first part of on a measure that falls within the MPM definition, it
the definition. Accordingly, the IASB has tentatively is required to prepare a disclosure within the financial
decided to add a note that the definition excludes statement. IASB has outlined four main points for the
“oral communication, transcripts and social media disclosure note, as presented in Figure 3.
posts” and add a rebuttable presumption, presented
As shown in Figure 3, the first and probably
in Figure 2.
the most time-consuming part of the disclosure
As observed, the rebuttable presumption is used as preparation will be the reconciliation of the MPM
a form of logical explanation that when an entity uses a to the closest subtotal that IFRS specifies. The
measure in its public communication, it communicates closest subtotal means the subtotal presented in the
management’s view of an aspect of an entity’s financial profit-and-loss statement prepared according to the
performance. The rebuttable presumption is meant standards. The reconciliation builds the high quality
to be used as guidance and reduction of subjectivity, of the information disclosed with MPMs in terms
but also as a possibility to avoid the requirement to of faithful representation and relevance, as it makes
present a measure that is not in its essence an MPM but it transparent and sometimes may enable users of
happened to be communicated in public. Therefore, financial statements to compare MPMs between
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 6

Disclosure requiremenets for MPMs

Reconciliation between MPM and the most directly comparable subtotal or

Reconciliation total specified by IFRS Accounting Standards, including the income tax
effect and effect on non-controlling interests

Why an MPM Includes an explanation of how the MPM is calculated and how the
communicates measure provides useful information about the entity's performance.
management's view Explanation should refer to individual reconciling items where necessary

Not necessarily A statement that MPM provides management's view of an aspect of the
comparable with other entity's financial performance and is not necessarily comparable with
entities measures provided by other entities

Explanation of and reasons for any changes in how the entity calculates its
Changes in calculation
MPMs or which MPMs it provides

Figure 3. Required Disclosures Regarding MPM

Source: Own elaboration based on FASB IASB Joint Educational Meeting (2022, September)

entities based on the algorithms used. However, it is 4.2. Reconciliation between MPM and
necessary to remind the reader that MPM may not
necessarily be comparable between entities to avoid
the Most Directly Comparable Subtotal
direct comparison of measures with the same name Specified by IFRS
without checking how they were calculated. Also, the
As there is a requirement for each MPM disclosed in
company must outline the changes to how MPM was
the financial report to provide a reconciliation, an
presented or calculated between successive years if
example is presented in Figure 4.
any changes were made.
In the example presented in Figure 4, the adjusted
Further, the entity is to explain reasons for
operating profit in MPM disclosed in the financial
including specific measures such as MPM, focusing
report is a management view of operating profit,
on its usefulness to the user of financial statements.
excluding incidental restructuring in country X.
Although the scope of MPM is limited to financial
Through subtraction of restructuring costs and
information and incomes and expenses only, the link
revenue adjustments, it is reconciled to the most
between performance results and the entity’s strategy
direct subtotal, which in this case is operating profit.
and/or short-term entity’s objectives articulated by
The two right columns affect income tax and non-
investors, products’ groupings (or assortments), or a
controlling interests (later referred to as NCIs), as the
sale’s geographical differentiation can be described.
entity is also obligated to include these effects for each
New financial and investing segments in profit-and-
reconciliation.
loss statements show prospects to disclose MPM
informing about these activities in the form of The new standard does not include a graphical
revenues and expenses from financial and investing sample of the reconciliation. During the discussion
managerial decisions. at the IASB meeting in July 2023, there seemed to be
an agreement that the standard would not require one
specific methodology with regards to reconciliations
but might propose examples to ease the process for
entities having trouble accommodating the differences
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 7

Adjusted operating profit (MPM) 60,000 Tax effect NCI

- Restructuring in Country X (incl. In employee benefits) -5,000 1,000 -800
- Revenue adjustment (incl. in revenue) -6,000 1,200 -
Operating Profit (IFRS-specified) 49,000

Figure 4. Reconciliation of the MPM

Source: Own elaboration based on FASB IASB Joint Educational Meeting (2022, September)

between MPM and the most directly comparable not very detailed information. On the other hand,
subtotal specified by IFRS. One of the points was of it underlines that an individual approach directed
the new methodology was to show the MPM first (at at high-quality MPM is crucial for users of financial
the top), which then gets reconciled to a subtotal. statements, and it should guide a manager when
making decisions. From the preparers’ point of view,
the decision about MPM should encompass technical
issues as a possibility to make detailed reconciliation,
4.3. Tax Effect on Reconciled Items
including the tax issues.
Another topic discussed was the proposal to include
the tax effect of reconciled items. On the one hand,
tax effect was requested by the users of financial
statements. It was strongly voiced as necessary to 5. Case Study
strengthen the reliability of financial statements and
the ability to analyse them properly. On the other hand, The case study is based on company A, whose data were
preparers voiced difficulty in calculating the tax effect, drawn from accounting books for three consecutive
which may be affected by many factors that might be years, from 2020 to 2022. The company chosen for this
difficult to explain to the user of financial statements case study prepares its financial data following IFRS
and hence actually hurt the faithful representation for consolidation purposes only. The data presented
and relevance. To satisfy both sides, IASB tentatively in the case study were anonymised, maintaining
decided to include a requirement to show the tax effect the scale of significance of individual transactions
on reconciled items but to allow simplification of this discussed in the case study. In this empirical part,
by applying either (IFRS Accounting, 07.2023): the project of the upcoming IFRS standard will be
• Statutory tax rate(s) applicable to underlying recalled as “IFRS X”. Company A uses presentation per
transaction(s) in the relevant jurisdiction(s), or, function for providing operating costs in its statement
of financial performance and decided to distinguish
• reasonable pro rata allocation of the current and the gross profit. For the three analysed periods, the
deferred tax, or, company paid the income tax at a lower effective rate
• another method achieving a more appropriate than the nominal tax rate because it was granted a tax
allocation due to specific circumstances. exemption for investing in a special economic zone.
The short version of the current statement of financial
Irrespective of the chosen methodology, the performance as per IAS 1 is presented in Table 1.
entity ought to explain how the income tax effect was
calculated and should be presented separately for each To be able to present the notes regarding MPMs,
item if more than one method was used. there is a need to present a transformed statement
of financial performance in accordance with new
In summary, the overall description of MPM
IFRS X guidelines and explain the main differences.
in the planned standard does not provide detailed
Transformed data from company A are presented in
information about what should be disclosed as
Table 2.
MPM. Instead, it focuses on a framework (or model
approach), as standards used to be. This, on the one When comparing statements of financial
hand, leaves room for management to decide what to performance prepared per IAS 1 and IFRS X, the
choose as MPM and to show management’s view on first difference worth noting is an introduction
the entity’s performance, allowing for selected, and of additional segments: investing and financing.
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 8

Table 1. Statement of Financial Performance for 2020–2022 in Accordance With IAS 1

Year (amounts in PLN) 2022 2021 2020

Revenue from the sale of goods 22,132,991 16,381,185 11,589,068

Cost of goods sold –15,447,701 –11,298,542 –8,178,590

Gross profit 6,685,290 5,082,644 3,410,478

Other income 410,245 201,756 414,358

Selling expenses –1,701,360 –1,192,527 –914,645

General and administrative expenses –2,554,044 –2,208,843 –1,738,436

Other expenses –453,009 –399,870 –514,536

Finance costs –8,058 –10,119 –153

Profit before tax 2,379,064 1,473,041 657,067

Income tax expense 128,469 154,669 57,164

Profit for the year from continuing operations 2,250,595 1,318,372 599,903

Loss for the year from continuing operations 0 0 0

Profit for the year 2,250,595 1,318,372 599,903

Source: Own elaboration

Table 2. Transformed Statement of Financial Performance for 2020–2022 in Accordance With IFRS X

Year (amounts in PLN) 2022 2021 2020

Revenue from the sale of goods 22,132,991 16,381,185 11,589,068

Cost of goods sold –15,447,701 –11,298,542 –8,178,590

Gross profit 6,685,290 5,082,644 3,410,478

Other income 265,245 102,756 376,358

Selling expenses –1,701,360 –1,192,527 –914,645

General and administrative expenses –2,554,044 –2,208,843 –1,738,436

Other operating expenses –444,009 –401,108 –510,036

Operating profit 2,251,122 1,382,922 623,720

Investment income 145,000 99,000 38,000

Investment costs –9,000 –6,000 –4,500

Profit before financing and income tax 2,387,122 1,475,922 657,220

Finance income 0 0 0

Finance costs –8,058 –2,882 –153

Profit before tax 2,379,064 1,473,041 657,067

Income tax expense 128,469 154,669 57,164

Profit for the year from continuing operations 2,250,595 1,318,372 599,903

Loss for the year from continuing operations 0 0 0

Profit for the year 2,250,595 1,318,372 599,903

Source: Own elaboration

 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 9

IAS 1 IFRS X
Revenue from the sale of goods Revenue from the sale of goods
Cost of goods sold Cost of goods sold
Gross profit Gross profit
Other income (1,2) (3) (4) Other income
Selling expenses Selling expenses
General and administrative expenses General and administrative expenses
Other expenses (3) Other operating expenses
Finance costs (5) (4) Operating profit
Profit before tax Investment income
Income tax expense Investment costs
Profit for the year from continuing operations Profit before financing and income tax
Loss for the year from continuing operations Finance income
Profit for the year Finance costs
Profit before tax
Income tax expense
Proft for the year from continuing operations
Loss for the year from continuing operations
Profit for the year

Figure 5. Changes in Classification Between IAS 1 and IFRS X

Source: Own elaboration

Additional segments are essential to note, as they As described in the section above, IFRS
change how certain transactions are presented X proposes an introduction of management
within the statement of financial performance performance measures. To showcase measures that
and, in consequence, how the financial statement would fall into the MPM definition, the authors
should be read by management, investors, and other discussed with the company what measures are
stakeholders. The main changes in classification used to review the financial performance of specific
between the segments are: entities within a group, as well as what is provided in
public communication. Four measures were presented
1) Dividends received were moved from other
by the company that meet MPM definition and scope:
incomes in the general segment to investment
(1) adjusted gross profit, (2) adjusted Earnings Before
incomes within the investment segment.
Interests Taxes Depreciation and Amortization
2) Interest received was also moved in the same (EBITDA), (3) adjusted Earnings Before Interests and
manner as dividends. Taxes (EBIT), and (4) adjusted profit before financing
and income tax.
3) Incomes and costs of investment properties were
moved from other incomes and other expenses The following part of the case study presents a
within the general segment into the investment sample of disclosure notes for MPM based on four
segment. disclosure requirements recognised by IFRS X.
The company must reconcile the MPM to the most
4) Exchange rate gains and losses were also decided
directly comparable subtotal or total specified within
to be reclassified. IFRS X requires that they be
IFRS, including the effect of tax and non-controlling
presented in the same section as the transaction
interests. In this case, the study of non-controlling
from which the exchange rate gain or loss
interests is disregarded, as the company under
occurred.
investigation does not invest in shares of any other
5) Interest raised from accruals for employee benefits company and is 100% owned by its parent company.
calculations was moved into the financial segment.
As presented above, the management of the
The movement between segments between IAS 1 company decided to use adjusted gross profit, adjusted
and IFRS X is summarised in Figure 5. EBIT, adjusted EBITDA, and adjusted profit before
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 10

financing and income tax to communicate the financial Table 3. Tax Rates Applicable to the Company for 2020–2022
results of the company to the users of financial
statements. They conclude that the chosen MPM Year 2022 2021 2020
reflects management’s overview of the company’s
financial performance. The company believes that Nominal tax rate 19% 19% 19%

presented management performance measures help Effective tax rate before 14% 21% 20%
readers of the financial report to understand the applying tax exemption
results of decisions made during the accounting period Effective tax rate after 5% 11% 9%
and to show the trend creation of the value for owners. applying tax exemption
They are not specified within IFRS standards, and
therefore, they may not be comparable with similar Source: Own elaboration
measures presented in the financial statements of
other companies, but they may be used to compare the financial statement. Company A refrained from
performance results between companies within the using adjusted gross profit from 2022 financials, as
capital group in which the company is operating reasons to adjust gross profit did not prevail anymore
(assuming other entities use the same MPM). (the incidental cost reduction appeared once in 2020;
The statutory tax rate for a company’s profit is therefore, there is no value in correcting and showing
19%. After the correction of incomes and costs of the adjusted gross profit in the financial statement
the company for each year per tax regulations, an for the year 2022 and following). At the same time,
effective tax rate was computed. Due to investment the company started using adjusted profit before
in the special economic zone, the company received financing and income tax as a separate MPM from
an additional tax exemption for a specified group of adjusted EBIT and EBITDA from 2021 to show the
finished goods (services) and a specified amount of tax. impact of occasional loans given, which, in the view
As a result, the effective tax rate after applying for the of the company, will not be a prevalent activity in the
special economic zone tax exemption was computed, company.
which is lower than the nominal and effective tax rate For reconciliation purposes, the company
before applying for the tax exemption. For the three decided to adjust the subtotals by following incomes/
following years, tax rates are presented in Table 3. expenses:
The tax exemption is granted for specific products • Incidental cost reduction: A cost reduction of
and services; thus, the effective tax rate for the year is salaries that occurred in 2020 as many countries
known after separating activities with and without tax received help from the government due to the
exemption and after the allocation of joint expenses COVID-19 pandemic. It was a reduction of salary
between these two groups. Examples of joint expenses burdens, which were accounted as cost reductions
are administrative (general) expenses that are incurred within the cost of goods sold, sales costs, and
but are impossible to specify precisely how much administrative costs.
is attributable to tax-exempt and taxable activities.
Because of the above-described tax calculations, it is • Incidental expenses and incomes: Each year, the
challenging (and time-consuming) to calculate the company has some expenses that happened once
actual effective tax rate for items reconciled within and, in the view of the company, are unlikely
MPM; therefore, the company chooses to present the to appear again; therefore, the financial results
pro rata allocation based on the global effective tax should be viewed separately. The following table
rate applicable to the whole company for the specific shows what incidental expenses and incomes
period. The company predicts that the tax exemption occurred each year.
amount granted will be sufficient to cover profits for • Internal group costs are incurred for internal
the next three years; therefore, the company believes group settlements that should be deducted from
the data are accurate and helpful for next years’ financial results, as they are outside the managing
predictions. directors’ jurisdiction.
From the four MPMs presented earlier, not all of • Depreciation and amortisation cost.
them would be used by the company every single year.
• Interest received from loans.
The IFRS X allows that but requires the company
to explain reasons for changing MPMs presented in • Exchange rates gain/loss from interest.
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 11

Table 4. List of Incidental Income and Expenses in Company A for 2020–2022

Items 2022 2021 2020

Incidental income Settlement with a customer over Insurance compensation for

a dispute a car broken in an accident

Incidental expense Cost of cancelled orders already Costs of repair of car broken Donation to fund masks
prepared which could not be sold in an accident for a hospital (COVID
to another customer pandemic)

Source: Own elaboration

Table 5. Reconciliation of Adjusted Gross Profit

2022 2021 2020

Adjusted Gross Profit 6,685,290 Tax effect 5,082,644 Tax effect 3,210,792 Tax effect

- incidental cost reduction 0 0 0 0 199,686 17,373

Gross Profit 6,685,290 5,082,644 3,410,478

Source: Own elaboration

The reconciliation of the adjusted gross profit with on reports regarding company and total capital group
the subtotal presented in the statement of financial performance, meeting the MPM definition.
performance is presented in Table 5. While EBIT and EBITDA are commonly presented
The company used adjusted gross profit in 2020 measures by companies, the computation presented in
to present an incidental cost reduction of costs Table 7 provides precious information to the users of
presented in the gross profit section, as the company financial statements, as they have direct and accessible
felt that this one-time cost reduction had a clear data as to how EBIT and EBITDA presented in
impact on the view of the company’s earnings and various companies’ reports were calculated and what
might lead to false judgements by the users of the transactions were subtracted from the profits. That
financial statements had they not known the value of highly increases transparency.
gross profit if the cost reduction had not occurred. Lastly, Table 7 presents a reconciliation of adjusted
Since the cost reduction did not occur again in the profit before financing and income tax, which company
following years, the company decided to refrain from A decided to start using due to the introduction of
presenting this MPM in the financial statements from IFRS X, which adds additional mandatory subtotals:
2022 onwards, as the adjusted gross profit would not investing and financing segments.
be different from the gross profit itself (the reasons
to calculate adjusted gross profit and the present has The company presented an adjusted profit before
ceased). financing and income tax by subtracting gains on
interest loans and exchange rate gains and losses from
The reconciliation of adjusted EBITDA and said interest. In the company’s view, the given loans,
EBIT with the subtotal presented in the statement of while intentional, will probably not be a recurring
financial performance is presented in Table 6. transaction; therefore, the company wanted to show
For all three years, company A used adjusted the possible results had the loans not been given.
EBITDA and adjusted EBIT as their MPMs. Incidental The company is also considering using
transactions are excluded from financial profits before another MPM for the financing segment due to its
evaluating the company’s performance. Further, introduction by IFRS X. However, to date, the volume
internal group costs are subtracted from the financials of transactions in the financing segment is irrelevant,
to receive adjusted EBIT, which is further corrected and the company decided to refrain for now to preserve
by depreciation and amortisation costs, which the balance between the informativity and usefulness
concludes with adjusted EBITDA. Both are presented of the financial statement.
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 12

Table 6. Reconciliation of Adjusted EBITDA and EBIT

2022 2021 2020

Adjusted EBITDA 3,284,290 Tax effect 2,211,128 Tax effect 1,094,873 Tax effect

- depreciation and amortisation –576,849 –31,150 –432,542 –45,417 –387,866 –33,744

Adjusted EBIT 2,707,441 1,778,586 707,008

- Internal group costs –352,095 –19,013 –320,195 –33,620 –386,420 –33,618

- incidental incomes 46,518 2,512 22,741 2,388 0 0

- incidental expenses –14,743 –796 –5,210 –547 –7,500 –653

- incidental cost reduction 0 0 0 0 344,132 29,939

Profit before financing and income tax 2,387,122 1,475,922 657,220

Source: Own elaboration

Table 7. Reconciliation of Adjusted Profit Before Financing and Income Tax

2022 2021 2020

Adjusted profit before financing and 2,351,122 Tax effect 1,447,922 Tax effect 657,220 Tax effect
income tax

- interests received from loan 30,000 1,620 25,000 2,625 -

- exchange rates gain/loss from interests 6,000 324 3,000 315 -

Profit before financing and income tax 2,387,122 1,475,922 657,220

Source: Own elaboration

The company did not decide to present additional and costs (expenses), the IFRS prioritises presenting
measures used in public communication outside of financial results over providing information about
financial statements because the company feels the use changes in the value of assets or sources of its
was incidental. In essence, public communications do financing. This indicates that the new standard will
not communicate management’s view of any aspect of not provide more detailed information about the assets
an entity’s financial performance, and thus does not with which the company achieves results but will only
meet the rebuttable presumption specified within the focus on the results achieved that will be presented in
MPM scope. a new, more detailed disclosure. Also, the described
boundaries of MPM exclude non-financial measures
widely developed in the management performance
measures literature (Bahrl et al., 2016).
6. Discussion Further, as the planned standard does not provide
a list of MPMs, one can expect managers—who have
The first important finding from the analysis of the ED superior knowledge about future cash flows—to
and the case study conducted is that MPMs are a much reveal their expectations through metrics included
narrower category than the metrics described so far in the MPM of the entity. The above is derived from
in the management literature (e.g., Kaplan & Norton, signalling theory, pinpointing the need to inform
1992; Kennerley & Neely, 2003; Neely et al., 2000). By investors about the degree of the implementation of
narrowing the MPM to the categories of revenues their demands.
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 13

In turn, agency theory points out that principal- decision-making processes are to be modified to fit
agent problems might result in discretionary choices the plan requirements of MPM in financial reporting.
made by managers, encompassing the metrics included
In addition, our study clearly highlights that a
in MPM. This is even more important when the entity
single presentation of a certain measure of an entity’s
operates in a highly competitive environment, so it
performance—following the new regulations—does
tries to protect itself from competitors. In such a case,
not mean that this measure is automatically included
the set of MPM might not, in practice, be the set of
among MPMs, which should be clearly signalled in
performance measures used by managers in making
financial reporting. Thus, both preparers and users of
day-to-day business decisions. This may apply to
financial statements should remember what metrics
differences between detailed and aggregated financial
are included in MPM and what is communicated once,
data disclosed and keeping secret data indicating the
or occasionally. The latter does not have to conform to
reasons for maintaining a competitive advantage. Due
strictly defined quality characteristics, making these
to the above-described boundaries of MPMs and their
metrics less reliable but not less relevant in many
limits in a comprehensive assessment of the entities’
cases. In addition, it should be clearly stated that the
performance, it would be interesting to investigate,
comprehensive assessment of the entity’s wealth and
in future research, the relations between signalling
performance should be done based on MPM as well
theory and agency theory when managers decide
as on other measures not presented among MPMs.
about the set of performance metrics used as MPM.
Thus, we call for future research on how the inclusion
Further, our study points out that despite the of MPMs into financial reporting changes the way
planned definition of MPM, one cannot expect financial statement users judge a report’s reliability
uniform (identical) measures to be presented by and relevance and how it changes the way they search
different companies, even those in the same sector. for additional information outside the data provided
Indeed, one can expect similar measures presented by by the entities.
entities because the reflection of the management’s
view should be linked to metrics used internally to
make decisions in the company and within revenues
and costs (expenses), the number of metrics is somehow 7. Conclusions
limited. This result calls for future research regarding
the similarities and differences between sets of MPMs The conclusions of the analysis of the planned
used by entities in the same geographical region or IFRS, together with the case study, can be presented
within a specific sector. It would also be interesting separately for preparers of financial statements
to investigate what factors may influence what MPMs (together with those who provide software for entities’
are shown by companies from particular industries or accounting information systems), external users of
who are performing specific activities. financial reporting, and the researchers interested not
only in financial reporting but also in management
Another important finding of our study is that
accounting. The planned standard to supersede IAS 1
the requirements of presentation, together with a
requires that preparers formulate a well-thought-out
reconciliation of MPMs, serve the transparency of the
set of MPMs used in the entity’s financial reporting. It
presented measures and, above all, impose mandatory
might require changes in the accounting information
high qualitative characteristics appropriate for each
systems of the entities, e.g., in the form of new modules
component of the financial statement. Comparing
or additional software to already existing software to
this IFRS requirement with already used performance
ease the preparation (and/or conversion) of financial
metrics in the entities indicates that preparers
data used as MPMs. Regarding the users of financial
of financial reports should verify the metrics
reports that include MPMs, it is crucial to bear in
incorporated into MPMs in terms of their compliance
mind the boundaries of planned performance metrics
with strict quality requirements imposed by the
and thus not rely solely on those metrics presented by
planned standard, e.g., subjectivity limiting. This
managers of the entity.
seems crucial when there is a decision to use some of
the metrics already existing within the management For research, in addition to the paths already
accounting system of the entity. For future research, presented in the previous paragraph, we suggest
it would be stimulating to examine whether and developing models or frameworks helpful in managers’
how much the metrics already used in management decisions about the MPM catalogue that will meet the
 CEEJ • 11(58) • 2024 • pp. 1-16 • ISSN 2543-6821 • DOI: 10.2478/ceej-2024-0001 14

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