Guidelines for the Presentation of Alternative Performance Measures

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Based on Article 15(4) of the Act on the Croatian Financial Services Supervisory Agency (Official Gazette nos. 140/05 and 12/12) and Article 696 of the Capital Markets Act (Official Gazette nos. 65/18 and 17/20), the Croatian Financial Services Supervisory Agency, at a meeting of its Management Board held on 18 December 2020, adopts

GUIDELINES
FOR THE PRESENTATION OF ALTERNATIVE PERFORMANCE MEASURES

1. Introductory provisions and purpose of the guidelines
   The Croatian Financial Services Supervisory Agency (hereinafter: Hanfa) is authorized, in accordance with Article 501 of the Capital Markets Act (Official Gazette nos. 65/18 and 17/20, hereinafter: CMA), to supervise the implementation of obligations regarding information on issuers whose securities are listed on a regulated market. Among other things, Hanfa is authorized to verify whether the issuer's financial information has been prepared in accordance with the relevant financial reporting framework (in the Republic of Croatia, these are International Financial Reporting Standards). The issuer's financial information also includes alternative performance measures.

Alternative performance measures are in most cases included in the issuer's management report, which is an integral part of the annual, half-yearly, and quarterly reports. Furthermore, in prospectuses for the issuance and listing of securities on a regulated market whose publication is approved by Hanfa, alternative performance measures are also in most cases stated. Likewise, alternative performance measures may be contained in disclosures of inside information published in accordance with Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC, as well as in other public disclosures by issuers.

The European Securities and Markets Authority (hereinafter: ESMA) adopted the Guidelines on Alternative Performance Measures in 2015. On 23 July 2020, Hanfa declared to ESMA that it would fully comply with the provisions of the Guidelines on Alternative Performance Measures from 1 July 2020.

The purpose of these Guidelines for the Presentation of Alternative Performance Measures (hereinafter: Guidelines) is to further ensure uniform treatment by issuers and persons responsible for the prospectus when presenting alternative performance measures, so that such information is comparable, reliable and understandable, thereby facilitating informed investment decisions by investors. The Guidelines also aim to promote transparency and the benefits of including alternative performance measures in financial information disclosures, whether published in management reports or press releases, stated in business result presentations, and so on.

2. Presentation of alternative performance measures
   An alternative performance measure is a financial measure of historical or future financial performance, financial position, or cash flows, other than a financial measure defined or specified in the relevant financial reporting framework. Examples of such alternative performance measures are net debt, profit before one-off costs, profit before interest, tax and depreciation (EBITDA), and similar terms indicating an adjustment of items in the basic financial statements.

1 ESMA, together with the Guidelines on Alternative Performance Measures, also published the document Questions and Answers on ESMA Guidelines on Alternative Performance Measures. Both documents are available on Hanfa's website.

When presenting alternative performance measures, issuers and persons responsible for the prospectus must apply these Guidelines in addition to ESMA's Guidelines on Alternative Performance Measures, as follows:
a) Definition and names of alternative performance measures A definition of the used alternative performance measures must be provided, along with their components and basis for calculation. The definition must be published in a clear, legible, and understandable manner.
Alternative performance measures should have meaningful names that reflect their content and basis for calculation. b) Usefulness of alternative performance measures It must be explained why a particular alternative performance measure is used so that users can understand its importance and reliability. The issuer should use only those alternative performance measures which it considers appropriately reflect the financial position and performance. Although certain alternative performance measures are used as well-known, such as EBITDA or EBIT, it is still necessary to indicate to investors why and how management uses the published alternative performance measures when making business-related decisions, and in what way investors should take these measures into account. c) Reconciliation with items in basic financial statements A reconciliation of alternative performance measures with items from financial statements must be published, clearly explaining the reconciling items, i.e., items from basic financial statements taken into account when calculating the alternative performance measure. Thus, it is necessary to show an item, subtotal, or total presented in the financial statements that is relevant to that alternative performance measure. If a reconciled item cannot be directly linked to positions in the financial statements or notes to the financial statements, issuers must indicate the position within which the stated item is presented in the financial statements. It is recommended to present numerators and denominators of alternative performance measures in tabular form, along with indicating within which positions of the financial statements or notes they are presented. If the reconciliation of a particular alternative performance measure is explained in previously published documents, reference may be made to those documents if users can access them in a simple and quick manner. Such cross-referencing must be clear and precise (exact location and page number of the referenced document). d) Normalised alternative performance measures In disclosures of alternative performance measures where the aim is to show business results by excluding certain items representing one-off events, it must be clearly indicated that the presented amount represents a normalised alternative performance measure, and items and amounts excluded from the calculation must be clearly stated so as not to mislead investors. When publishing reconciliations, it is recommended to present numerators and denominators in tabular form, the amounts of each individual reconciliation of the numerator and/or denominator of the alternative performance measure, as well as an indication within which positions of the financial statements or notes the reconciled numerator and denominator amounts are presented, if the reconciled items cannot be directly linked to positions in the financial statements or notes.

Normalised net profit or EBITDA after removing one-off items are commonly published, such as profit/loss from the purchase/sale of a subsidiary, revenue from product and service sales generated by the subsidiary (divested business segment), restructuring costs, legal costs, severance pay, and similar items. Based on clearly stated items or one-off events for which the alternative performance measure is reconciled, investors can assess whether it is justified to reconcile the alternative performance measure considering the frequency of event recurrence. For example, when severance or asset impairment costs occur regularly or cyclically, presenting alternative performance measures that exclude these costs may not be justified. Likewise, in some cases it is questionable to exclude from operating profit or EBIT (profit before interest and tax) the costs of impairment of tangible and intangible assets, as both tangible and intangible assets are used to carry out activities or generate sales revenue. Furthermore, if a normalised alternative performance measure is disclosed for a one-off event, it is not justified to exclude only cost items related to that event; revenue items related to the same event must also be excluded. For example, if effects of impairment of certain assets are excluded when calculating an alternative performance measure, appreciation effects of the same asset must also be excluded. e) Comparative data Alternative performance measures must be accompanied by comparative data for all prior periods presented. f) Consistency The definition and calculation of alternative performance measures should be consistent throughout their presentation. If a change does occur, the changes must be justified, an explanation provided as to why the new alternative performance measure provides more reliable and better information, and comparative data restated. If a particular alternative measure ceases to be presented, it must be stated why it is no longer considered an appropriate measure for presenting business performance. Issuers should also be consistent in presenting alternative performance measures in management reports, prospectuses, and other disclosures, such as press releases and similar communications.

3. Final provisions
   Issuers and persons responsible for the prospectus are obliged to take all necessary actions to align the presentation of alternative performance measures with these Guidelines.
   These Guidelines will be published on Hanfa's website and enter into force on 1 January 2021.
   CLASSIFICATION: 011-02/20-01/03
   REFERENCE NUMBER: 326-01-60-62-20-1
   Zagreb, 18 December 2020.
   CHAIRMAN OF THE MANAGEMENT BOARD dr. sc. Ante Žigman