Resistance mounts to companies obscuring coronavirus impact in financials

A backlash is growing among regulators and participants in the junk-bond market against the new accounting practices of the pandemic that obscure the virus’s impact on businesses.

Moody’s Investors Service is the latest organization to speak out against a financial contortion known as earnings before interest, taxes, depreciation, amortization and coronavirus — or EBITDAC, as opposed to the usual EBITDA. This week the ratings firm issued a report that said EBITDAC probably includes “a number of hypothetical and highly subjective adjustments”.

Moody’s criticism follows similar comments last month from a group of high-yield investors that said using EBITDAC is “inappropriate” and could lead to “fictitious figures.”

Regulators are also running out of patience with the practice.

Europe’s top markets watchdog, the European Securities and Markets Authority, called for “caution regarding any separate presentation of the impacts of the COVID-19 pandemic in issuers’ profit or loss statement”, according to a report on May 20.

Highly subjective

The Financial Reporting Council, which regulates U.K. auditors and accountants, also expressed concern, warning that alternative measures of financial performance which attempt to show “normalized” results are likely to be “highly subjective” and “potentially unreliable”.

The debate is reminiscent of previous resistance by investors to adjustments to EBITDA, known as “add-backs,” because they make companies look more creditworthy by increasing revenue and earnings. Adapting the numbers to include earnings lost to the virus goes a step further.

“It’s absolutely unacceptable behavior,” said Tatjana Greil Castro, a portfolio manager at Muzinich & Co Ltd. in London. “You can’t wish everything away that doesn’t suit you.”

U.S. packaging firm Greif Inc., German beauty retailer Douglas and Spanish gaming company Cirsa all included EBITDA adjustments for the coronavirus pandemic in recent weeks. The companies also reported separate EBITDA figures free of adjustments.

Incremental costs

Greif included $0.9 million of “incremental COVID-19 costs” when calculating the adjusted EBITDA figure in its results on June 3.

A spokesman said the company excludes non-recurring special items from financial results because they're not reflective of ongoing operations.

Daniel Perez Garcia-Santos/Getty Images Europe

“The adjustments provide a more stable and consistent platform for investors to compare the historical performance of the company,” the spokesman said in an emailed statement.

Meanwhile, Douglas reported about 15 million euros ($17 million) of COVID adjustments on May 27.

“We apply the highest transparency standards in our financial reporting,” a spokeswoman at the company said in an email. “Therefore, we have decided to report the effects of the COVID-19 pandemic separately in order to provide our investors with the best possible assessment of the underlying business.”

Cirsa made 32.8 million euros of adjustments in its earnings on May 26 related to “the estimated EBITDA impact from uprecedented year-over-year volume declines due to the COVID-19 pandemic.”

— With assistance from Marianna Aragao