FASB's big headache: How to bring order to adjusted earnings without stifling businesses

A critical debate is continuing to unfold within the financial world regarding how companies should disclose their customized financial metrics, prompting scrutiny over the appropriate regulatory oversight. While the International Accounting Standards Board (IASB) advances efforts to bring these "adjusted" figures under stricter audit, its American counterpart, the Financial Accounting Standards Board (FASB), is cautiously examining how to tackle corporate America's widespread, yet frequently opaque, application of these measures.

At a joint educational discussion on Oct. 3, 2025, between the boards, the core challenge was laid bare. Companies frequently present key performance indicators (KPIs), non-standardized financial metrics like EBITDA (earnings before interest, taxes, depreciation and amortization), free cash flow and current ratio to explain their performance to investors. However, FASB Chair Richard Jones articulated the crux of matter: "The only place you can't find it is in the financial statements." This stark observation underscores the ongoing dilemma for investors who increasingly rely on these metrics, despite their lack of consistency and official scrutiny.

The FASB is currently in a research phase, initiated after a 2021 agenda consultation, to understand the prevalence and comparability issues associated with financial KPIs. The objective is to determine if feasible accounting solutions exist and whether to add a project to its technical agenda. Initial research and stakeholder feedback, gathered through an invitation to comment (ITC) last year, confirmed that KPIs are widely used by investors but are generally not comparable across different companies or even within industries. The research found that even a seemingly common metric like EBITDA is calculated inconsistently.

Among the potential solutions discussed, requiring companies to disclose their management-presented KPIs in the notes to the financial statements garnered significant support. This approach, which would subject these metrics to audit, is seen to enhance transparency and quality, especially if coordinated with the U.S. Securities and Exchange Commission (SEC).

IASB's “transparency first" approach

Across the Atlantic, the IASB has already taken a significant step with its new "IFRS 18" standard, which addresses management performance measures (MPMs) and takes effect in 2027. IASB member Nick Anderson explained that the board deliberately chose not to attempt to define "adjusted" measures, recognizing their highly entity-specific nature. Instead, IFRS 18 demands that if a company presents an MPM, essentially any adjusted figure used to explain its business, must be clearly disclosed and subject to audit within its official financial statements.

Anderson lauded the early results, stating IFRS 18 has been "very positively received" and provides "transparency to management of their stories." IASB highlighted that implementing IFRS 18 has spurred "cleanup opportunities" within companies, forcing finance and investor relations teams to scrutinize and justify their non-GAAP adjustments, leading to improved quality and consistency. IASB Chair Andreas Barckow reiterated their "primary goal was not to define KPIs," but rather to "bring about transparency if a company uses a KPI," arguing that investors value these adjusted numbers as another perspective alongside the GAAP view.

IASB member Bob Uhl added that users prioritize understanding how a KPI is calculated and how it links to the financial statements, rather than demanding strict comparability across all KPIs themselves. He suggested that comparability of the underlying GAAP base from which KPIs are derived is more crucial. IASB staff also noted that IFRS 18 requires a disclosure around changes that companies make to non-GAAP measures, addressing a common investor complaint about frequent, unexplained alterations.

U.S. caution: The fine line between clarity and red tape

Despite the IASB's positive experience, FASB members expressed significant caution regarding broad standardization efforts for the U.S. environment. Jones pointed out that American companies have "freedom of speech" in presenting their results and that current SEC rules already require reconciliation of non-GAAP measures to official GAAP figures. He said that no matter what accounting standard setters define, companies will likely continue to present "adjusted" numbers that suit their narrative.

FASB Vice Chair Hillary Salo voiced concerns about the board attempting to "pick winners and losers" by defining specific KPIs, warning against creating a "never-ending project" with hundreds of pages of guidance, reminiscent of the complexities around earnings per share (EPS). FASB member Christine Botosan also raised a critical point shared by academics: increasing the cost of providing voluntary information, by subjecting it to audit, might lead companies to reduce the amount of information they provide, potentially harming investors.

Ultimately, while the IASB has moved ahead with audited transparency for management presented measures, the FASB remains in deep consideration. They are weighing the clear investor demand for consistent, understandable data against the risks of stifling corporate communication and adding overly burdensome regulations, according to the discussions. As Jones noted, reflecting on the long-term nature of the challenge, "My guess is post-2027, we will still be talking about the KPIs in one form or another."

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