The many faces of earnings before interest, tax, depreciation and amortisation (EBITDA): Assessing the decision usefulness of EBITDA disclosure by Johannesburg Stock Exchange-listed companies

Mattheus T Mey,Christiaan Lamprecht

doi:10.4102/jef.v13i1.488

Abstract

Orientation: The voluntary disclosure of non-Generally Accepted Accounting Principles (non-GAAP) earnings may lack decision-usefulness if not faithfully represented or comparable. Commonly accepted as being well defined, earnings before interest, tax, depreciation and amortisation (EBITDA) may be misleading if labelled, defined and calculated inconsistently. Research purpose: To assess the decision-usefulness of EBITDA disclosure by Johannesburg Stock Exchange (JSE)-listed companies. Motivation for the study: Prior research on voluntary disclosure largely excluded EBITDA from its focus, accepting it as standardised. Research approach/design and method: A quantitative content analysis was used to analyse the EBITDA disclosure in 220 Stock Exchange News Service (SENS) reports in which JSE-listed companies reported their annual results for the period 2014–2016. Main findings: Companies inconsistently labelled, defined and calculated EBITDA. Twenty-four per cent of the SENS reports labelled and defined EBITDA as earnings before interest, tax, depreciation and amortisation, but calculated it by adjusting for other items as well. Companies’ definitions of EBITDA also differed widely, with 27 different definitions identified in 52 SENS reports that disclosed an unmodified EBITDA label. Practical/managerial implications: Existing JSE reporting requirements appear lacking in ensuring that companies disclose EBITDA that is faithfully represented and comparable. The identified diversity of definitions has implications where EBITDA is used for valuation and contracting purposes. Contribution/value-add: The study contributes to the voluntary disclosure literature by focussing on a non-GAAP earnings measure that has largely been ignored by prior research, namely EBITDA. Empirical evidence is presented on the diversity that exists in EBITDA disclosure by JSE-listed companies.

Highlights

Earnings before interest, tax, depreciation and amortisation (EBITDA), widely perceived as accounting EBITDA (Brown 2016; International Accounting Standards Board [IASB] 2017a), is an important non-Generally Accepted Accounting Principles (GAAP) earnings measure (Papa, Peters & Schacht 2016)
The results from this study further suggest that existing Johannesburg Stock Exchange (JSE) reporting requirements are not explicit enough to ensure that companies’ EBITDA disclosure exhibit a faithful representation that facilitates decision-useful information
220 SENS reports containing the annual results of JSE-listed companies for the financial years 2014–2016 were analysed to determine whether companies labelled, defined and calculated EBITDA in a consistent manner

Summary

Introduction

Tax, depreciation and amortisation (EBITDA), widely perceived as accounting EBITDA (Brown 2016; International Accounting Standards Board [IASB] 2017a), is an important non-GAAP earnings measure (Papa, Peters & Schacht 2016). Non-GAAP earnings, not defined in accounting standards, is seen by financial executives and investors as an important disclosure tool that enables management to provide users of financial reports with proprietary information that, arguably, provide better decision-useful information than GAAP earnings (Graham, Harvey & Rajgopal 2005; Papa et al 2016). The importance of non-GAAP earnings to users of financial reports is underscored by the assumption that, even in efficient markets, company management has superior inside information that can be decision-useful to users (Healy & Palepu 2001). This discretion could result in inconsistencies between how companies calculate nonGAAP earnings, raising the concern of a lack of comparability (IASB 2017a). A further concern is that if non-GAAP earnings are inaccurately labelled and inadequately explained, it may not be faithfully represented, but misleading (IASB 2017a)

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Conclusion