Performance measures: MPMs and non-GAAP disclosures

Almost every listed company tells its story with numbers that are not defined in the accounting standards: adjusted earnings, adjusted EBITDA, organic growth, free cash flow, same-store sales. Management argues that these measures strip out items that do not reflect underlying performance and show the business as management runs it. Investors use them heavily, and many executive pay plans are built on them. Regulators accept that they can be useful but worry that they are often used to present a rosier picture, by excluding costs that are in fact normal and recurring. This lesson looks at how each framework and regulator handles these measures, and at the judgments a reporting team makes when it chooses and reconciles them.

Management-defined performance measures under IFRS 18

IFRS 18 brings some of these measures inside the audited financial statements for the first time. A management-defined performance measure (MPM) is a subtotal of income and expenses that the entity uses in public communications outside the financial statements, that it uses to communicate management's view of an aspect of the financial performance of the entity as a whole, and that is not a subtotal required by IFRS Accounting Standards or specifically listed in IFRS 18. Ratios are not MPMs, and neither are measures that are not subtotals of income and expenses, such as free cash flow or customer numbers. Subtotals that IFRS 18 lists as excluded, such as gross profit and operating profit before depreciation, amortization and impairments within the scope of IAS 36, are also not MPMs, so a plain EBITDA defined that way is exempt, while an adjusted EBITDA that removes restructuring costs is an MPM.

For each MPM, IFRS 18 requires disclosure in a single note: a description of the aspect of performance the measure communicates and why management believes it provides useful information; how the measure is calculated; a reconciliation to the most directly comparable subtotal specified by IFRS Accounting Standards; the income tax effect and the effect on non-controlling interests for each reconciling item, with a description of how the tax effect was determined; and, if the entity changes the calculation, an explanation. Because the note is part of the financial statements, the MPM disclosures are audited. Companies must label MPMs faithfully and present them in a way that is not misleading. Canadian securities law adds its own layer: National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure, in force since August 2021, applies to measures disclosed outside the financial statements, including in MD&A and news releases, and requires labelling, equal prominence for the most directly comparable financial statement measure, explanation and reconciliation.

Tamarind Bay's adjusted measures

Tamarind Bay has reported two adjusted measures for years: adjusted operating profit, which adds back restructuring, impairment and acquisition-related costs, and adjusted EBITDA, which also adds back depreciation and amortization. Its credit agreement defines a covenant EBITDA that happens to equal adjusted EBITDA. In 2026 the business development team proposes a new adjustment: excluding 14.0 million of slotting fees paid to a national grocery chain to win shelf space for a new snack line, on the grounds that the fees are a one-off investment.

# IFRS 18 management-defined performance measure (MPM): adjusted operating profit.
# Each reconciling item must show its income tax effect and its effect on non-controlling
# interests (NCI). Tamarind Bay Foods, 2026, millions (invented). Harrow Creek is 80% owned.
op_profit = 129.2
items = [  # (name, pre-tax amount, deductible share, part arising in Harrow Creek)
    ("Restructuring", 18.6, 1.0, 1.5),
    ("Goodwill impairment, Frozen CGU", 46.0, 0.0, 0.0),
    ("Acquisition-related costs", 2.9, 0.4, 0.0),
]
rate, nci_share = 0.265, 0.20
print(f"{'':<40}{'Pre-tax':>9}{'Tax':>8}{'NCI':>8}")
print(f"{'Operating profit (IFRS 18)':<40}{op_profit:>9.1f}")
mpm, tax_tot, nci_tot = op_profit, 0, 0
for name, amt, ded, sub in items:
    tax = amt * ded * rate
    nci = sub * (1 - rate) * nci_share
    mpm += amt; tax_tot += tax; nci_tot += nci
    print(f"{'add: ' + name:<40}{amt:>9.1f}{0 - tax if tax else 0.0:>8.2f}{0 - nci if nci else 0.0:>8.2f}")
print(f"{'Adjusted operating profit (MPM)':<40}{mpm:>9.1f}{-tax_tot:>8.2f}{-nci_tot:>8.2f}")
print(f"\nDepreciation and amortization added for adjusted EBITDA: 71.7 -> {mpm + 71.7:.1f}")
proposed = ("Slotting fees paid to retailers", 14.0)
print(f"Rejected adjustment: {proposed[0]} ({proposed[1]}) - a normal, recurring cost of selling")

                                          Pre-tax     Tax     NCI
Operating profit (IFRS 18)                  129.2
add: Restructuring                           18.6   -4.93   -0.22
add: Goodwill impairment, Frozen CGU         46.0    0.00    0.00
add: Acquisition-related costs                2.9   -0.31    0.00
Adjusted operating profit (MPM)             196.7   -5.24   -0.22

Depreciation and amortization added for adjusted EBITDA: 71.7 -> 268.4
Rejected adjustment: Slotting fees paid to retailers (14.0) - a normal, recurring cost of selling

Adjusted operating profit is an MPM: it is a subtotal of income and expenses, Tamarind Bay uses it in its MD&A, earnings releases and investor presentations, and it communicates management's view of performance. The reconciliation starts from the IFRS 18 operating profit of 129.2 million, the most directly comparable specified subtotal, and adds back the three items. The note must show the tax effect of each: restructuring is deductible, so its tax effect is 4.93 million at 26.5 per cent; the goodwill impairment has no tax effect, because goodwill amortization is not deductible for this acquisition; and only 40 per cent of the acquisition costs are deductible. The NCI column picks up the 1.5 million of restructuring incurred at the 80 per cent owned Harrow Creek. Adjusted EBITDA, as Tamarind Bay defines it, also removes restructuring and acquisition costs, so it too is an MPM; a plain EBITDA would not be.

The slotting fee proposal fails. Slotting fees are a normal, recurring cost of selling packaged food: Tamarind Bay pays them every time it launches a product or enters a retailer, and lesson 4 shows that they reduce revenue. Excluding them would overstate the profitability of the new line and make the measure misleading. Calling them a one-off investment does not change their nature; every launch is a one-off in isolation. The audit committee rejects the adjustment, and the minutes record why.

Recurring restructuring and other hard cases

Restructuring raises a harder question. Tamarind Bay has reported restructuring charges in each of the last four years: plant consolidation in 2023, a sales reorganization in 2024, warehouse automation in 2025 and the Frozen network review in 2026. Each programme is different, but a reader could fairly ask whether restructuring is part of how this company normally operates. The regulators' position is not that recurring charges cannot be excluded, but that they cannot be described as non-recurring, unusual or infrequent, and that the explanation must be honest about the pattern. Tamarind Bay's 2026 disclosure therefore lists the charges for the last four years and explains why management still finds a measure before restructuring useful for comparing the operating performance of the continuing business.

Share-based compensation is a recurring debate. Many technology companies exclude it, arguing that it is non-cash and that its fair value depends on volatile share prices. Critics, including several large investors, reply that paying employees in shares is as much a cost as paying them in cash and that excluding it overstates profitability. Tamarind Bay does not exclude it, which makes its adjusted measures more conservative than some peers'. Whatever a company does, consistency matters: changing the definition of an adjusted measure from year to year to improve the trend is one of the patterns regulators look for, and IFRS 18 requires an explanation of any change in an MPM's calculation, with restated comparatives.

Key performance indicators and other measures

Not every measure is an MPM or a non-GAAP measure. Organic revenue growth, which removes acquisitions, disposals and currency effects, is a supplementary financial measure under NI 52-112 if it is calculated from amounts in the financial statements but is not itself presented there; it must be labelled and its composition explained. Operational metrics, such as tonnes produced or number of retail doors, are not financial measures at all, though the regulators expect them to be defined and consistently calculated. Ratios such as adjusted operating margin are non-GAAP ratios if a component is a non-GAAP measure. Free cash flow is a non-GAAP measure under NI 52-112 but not an MPM, because it is not a subtotal of income and expenses.

Using adjusted measures in pay and covenants

Adjusted measures matter beyond investor communication. Most of Tamarind Bay's annual bonus depends on adjusted operating profit, and its long-term incentive plan uses adjusted EPS. That creates a direct incentive for management to classify costs as adjustments. The compensation committee therefore approves the definition at the start of the year, specifies which kinds of items can be adjusted, and reviews every adjustment at year end, with internal audit testing the calculation. Lenders do the same in a different way: the credit agreement defines covenant EBITDA precisely, caps the add-backs for restructuring at a percentage of EBITDA, and requires a compliance certificate signed by the chief financial officer. When the definitions in pay plans, covenants and public reporting differ, the company must keep three sets of calculations, and analysts must be told which one they are reading.