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EBITDAC – A new performance indicator in financial reports; its validity is however questionable

Over the course of 2020, most companies have been directly affected by the coronavirus pandemic, particularly during the lockdowns. To record the effects of these on the financial situation the more frequent use of EBITDAC – an alternative performance indicator – has gained currency in the last months. However, a closer analysis of the indicator casts doubts on its validity.

EBITDAC – Earnings before interest, taxes, depreciation, amortisation and coronavirus

The new performance indicator EBITDAC is derived from the EBITDA performance measure. EBITDA represents earnings before interest, taxes and depreciation on property, plant and equipment/amortisation of intangible assets. To determine EBITDAC additional adjustments are made to take into account pandemic losses or pandemic profits.

Example: In its quarterly report as at 31.3.2020, the Schenck Process Group, a German industrial group, specified “adjusted EBITDAC” for the first time. The overall adjustment that was made amounted to € 5.4 m. In particular, the adjustments related to the gross profits that the group had missed out on as a result of the effects of the coronavirus and, working in the opposite direction, the recognition of state grants and support aid of around € 0.2 m. Schenck estimated that the gross profits that it had missed out on were around € 5.6 m so that the overall adjustment came to € 5.4 m (5.6 – 0.2 = 5.4).

Doubts as to the validity of the EBITDAC performance indicator

Generally, it is considered that it is only possible to objectively quantify the effects of coronavirus – which usually turn out to be very sector-specific and company-specific – with great difficulty. Admittedly, presenting a performance indicator adjusted for extraordinary effects could indeed be useful in order to make a comparison with the profit situation in previous years. However, in view of the very limited transparency or verifiability, the use of EBITDAC has definitely been viewed critically. In many cases it will not be possible to clearly assess the extent to which the coronavirus pandemic has actually affected the financial reporting data. For example, declines in sales, underutilised fixed assets or extensive restructuring and reorganisation measures are also frequently induced by impacts other than the coronavirus pandemic.

Even seemingly “straightforward” issues, such as uncollectable receivables, in many cases, will not necessarily be solely attributable to the coronavirus pandemic. Furthermore, when calculating EBITDAC, the positive effects also have to be taken into account, e.g., savings resulting from short-time working allowances, state aid (rescue packages, etc.) as well as sales increases in specific sectors (e.g. online retailing).

Pandemic effects in the annual financial statements and the management report

With respect to the comparability of annual and consolidated financial statements, it can be presumed that it will generally be the negative effects of the coronavirus pandemic that will result in adjustments being made in the context of calculating the EBITDAC, or that EBITDAC will only be reported as an alternative performance indicator by companies where the negative impacts predominate. It should generally be borne in mind that, in management reports, key financial performance indicators – as well as EBITDAC – have to be presented consistently (continuously). Consequently, this applies both to reporting that is backward looking as well as future-oriented (economic report and/or the report on expected developments). In this connection, in cases of doubt, difficulties will repeatedly arise when deriving EBITDAC for the forecast period.

In this respect, there will be many cases where determining both the quantitative as well as the qualitative effects of the coronavirus pandemic on the financial reporting will, in practice, cause greater problems and lead to discussions with the auditor of the annual accounts. If material – in nature and/or extent – extraordinary expenses and income affect the results in a reporting period then the disclosure requirements under Section 285 clause 1 no. 31 of the German Commercial Code will have to be complied with in the notes to the financial statements as well as in the requisite analysis of the earnings situation in the economic report section of the management report.

Conclusion: To sum up, it can be stated that it is likely that the statutory disclosure requirements in the notes to the financial statements and in the management report will frequently provide an adequate platform for a clear and comprehensible depiction of the effects of the coronavirus pandemic for users of financial statements. It would therefore appear to be questionable that it would make sense to seek to enhance the clarity and transparency by presenting EBITDAC in addition.

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