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Global accounting rule ends leeway over operating profit

Published 09/04/2024, 10:05
Updated 09/04/2024, 10:11
© Reuters.

By Huw Jones

LONDON (Reuters) - Companies will have to publish standardised operating profit figures from 2027 under new requirements from a global accounting rulesetter to help end what international investor Warren Buffett has called "misleading" numbers.

The International Accounting Standards Board (IASB) writes book-keeping rules used by about 50,000 companies across 147 countries, but not in the United States, which has its own rules.

IASB Chair Andreas Barckow said it marks a significant change by ending the discretion of companies to decide what constitutes operating profit in their income statement that investors rely on.

Currently, before arriving at a net profit or loss, many companies report earnings before interest, taxes, depreciation and amortisation or EBITDA, a figure that is not defined under IASB rules and therefore can be compiled in different ways to flatter performance.

Investors have called for more rigour to standardise information on operating profit and make comparability easier, Barckow told Reuters. "We need a standardised version so that we can actually base our analysis on the same anchor point".

Warren Buffett, chair of conglomerate Berkshire Hathaway (NYSE:BRKa), has described EBITDA as a "misleading statistic" by failing to include the cost of depreciation. His deputy Charlie Munger, who died in November, called it "bullshit earnings".

The new IASB rules define mandatory sub-totals for operating profit, which will include depreciation, amortisation and impairment on goodwill, and profit before financing and income taxes.

Common adjustments, such as for currency fluctuations, can only be included in footnotes to the statement.

Companies can continue reporting an EBIDTA figure, but only in the footnotes, if it can be reconciled with what's in the two new mandatory subtotals.

Banks and insurers will have to include interest, a key part of their business model, in their operating profit, which some already do.

Barckow said companies can use the new rules before statements for 2027 if they want to.

U.S. accounting rules are not being reformed in the same way as IASB norms.

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