Management-Defined Performance Measures under Ind AS 118

Understanding MDPBs: A New Lens on Performance Reporting

Ind AS 118 introduces a more structured way of presenting and explaining financial performance. One of its important concepts is the management-defined performance measure, or MDPB. It reflects a benchmark used by management to explain performance to investors and other users and brings transparency of these measures.

An MDPB is a subtotal of income and expenses that management uses in public communications outside the financial statements to communicate its view of an aspect of the entity's financial performance as a whole, and that is not already specified or required by Ind AS. In simple terms, if management highlights a performance subtotal such as "adjusted operating profit" or "profit before exceptional items" in an investor presentation or press release, that measure may need to be evaluated as an MDPB.

Why Ind AS 118 Focuses on MDPBs

Companies often use alternative performance measures to explain business results. These measures can be useful, but they may also reduce comparability if they are not clearly defined, reconciled and consistently presented. Ind AS 118 seeks to improve transparency by bringing such management-defined subtotals into the notes to the financial statements, with clear explanations and reconciliations.

The Three Core Tests

1. It must be a subtotal of income and expenses. The measure should combine income and expense items. Measures such as working capital, free cash flow, net debt, current ratio, debt-equity ratio, volume sold, ARPU or average room revenue are not MDPBs because they are not subtotals of income and expenses.

2. It must be used in public communications outside financial statements. Public communications include management commentary, press releases and investor presentations.

3. It must communicate management's view of financial performance. The measure should convey how management views an aspect of the entity's performance as a whole. If management does not use the subtotal internally, or presents it without prominence for another reason, judgement may be needed to decide whether it is truly an MDPB.

What Does Not Qualify as an MDPB?

Some subtotals are specifically excluded or already required by Ind AS and therefore do not qualify as MDPBs. Examples include gross profit or loss, operating profit or loss, profit or loss before income tax, profit or loss from continuing operations, and operating profit before depreciation, amortisation and impairments. Ratios such as EBITDA margin also do not qualify because they are not subtotals of income and expenses.

Examples: Applying the Concept

• Adjusted profit before tax: If disclosed in an investor presentation to explain management's view of recurring performance, this may be an MDPB.
• Free cash flow: This is not an MDPB because it is a cash flow measure, not a subtotal of income and expenses.
• Debt-equity ratio: This is not an MDPB because it is a financial ratio.
• Average room revenue or ARPU: These are operating or non-financial performance indicators, not subtotals of income and expenses.

Public Communication: Why the Channel Matters

A subtotal becomes relevant for MDPB assessment only when it appears in public communications outside the financial statements. For example, if "adjusted EBITDA" is used prominently in an investor deck or press release, it should be assessed. However, a similar figure mentioned only in an internal dashboard would not meet this part of the definition.

Case Illustration 1

Scenario: Technology cost mentioned in a media interview

During an interview with CNBC, the CEO referred to a technological cost of ₹234 crore relating to the "Hurricane" automation project, which was included within IT expenses in the statement of profit and loss. The figure was later highlighted in a tweet by CNBC's official social media handle. This disclosure would not qualify as an MDPB under Ind AS 118. Although the amount represents a component of expenses, it is not presented as a subtotal of income and expenses. More importantly, the communication arose through an oral interview and a social media post—both of which are excluded when identifying public communications for MDPB purposes. The example reinforces that not every publicly visible financial number becomes an MDPB; the form of the measure and the channel of communication both matter.

Case Illustration 2

Scenario: Adjusted Operating Profit

A listed company presents "Adjusted Operating Profit" in its annual investor presentation. The measure starts with operating profit and excludes restructuring costs and one-time legal expenses. Management explains that the measure reflects the performance of the continuing business and uses it in board-level reviews. Because the measure is a subtotal of income and expenses, is used in public communications, and communicates management's view of the entity's financial performance, it is likely to be an MDPB. The company should disclose it in a single note, explain why it is useful, describe how it is calculated, and reconcile it to the most directly comparable Ind AS subtotal.

Disclosure Requirements

For each MDPB, Ind AS 118 expects disclosure in a single note. The note should be clear enough for users to understand what the measure represents, why management considers it useful and how it relates to Ind AS amounts.

• A description of the measure and the aspect of performance it communicates.
• The reason management believes the measure provides useful information.
• The method used to calculate the measure.
• A reconciliation to the most directly comparable Ind AS subtotal or total.
• The income tax effect and non-controlling interest effect, where relevant, for each reconciling item.
• An explanation of changes in the measure, including new measures, discontinued measures or changes in calculation method.

Why This Matters for Preparers

The discipline around MDPBs will require companies to connect investor communication, internal management reporting and financial statement disclosures. Finance teams will need to identify measures used in public communications, assess whether they meet the definition, prepare reconciliations, and ensure consistency across periods. This is not only a compliance exercise; it is also an opportunity to make performance reporting more transparent and credible.