NFRA members differ on the use of EBITDA in financial results
January 23, 2026
Members in conflict over the reporting method for expenses in financial statements
The members at the NFRA (National Financial Reporting Authority) were in conflict recently over the adoption of Ind AS 118, an accounting standard that deals with the “presentation and disclosure in financial statements”. In a meeting held in December, NFRA member R. Narayanaswamy raised his concerns around the use of “EBITDA (earnings before interest, taxes, depreciation, and amortisation)” as a measure to report financial results.
In his argument, Narayanaswamy said that the management-defined performance measures (MPMs) like EBITDA should be kept outside the financial statements and notes and disclosed instead in management commentary if needed. “Financial statements should focus solely on accounting measures,” he said in the 22nd NFRA meeting. Instead of EBITDA, Narayanaswamy argued that aspects such as “gross profit” should be presented in the financial statements, which is a global norm, but often missing in the results of Indian firms.
EBITDA Dilemma
While supporting the inclusion of MPMs (like EBITDA), the Securities and Exchange Board of India (SEBI), which is represented on the NFRA board, said that Ind AS 118 might also articulate principles governing the selection of MPMs to avoid undue subjectivity.
To be sure, MPMs are company-specific subtotals of income and expenses, which are typically used outside of the formal financial statements, to show management’s view of performance.
Further, Narayanaswamy proposed that preference should be given to “functional classification” of expenses over “natural classification”, which is a norm among listed Indian companies at the moment.
Global Reporting Norms
Narayanaswamy said that “functional classification of expenses” is more user-friendly, and a preferred method of reporting among major US companies such as Amazon, Microsoft, Walmart and Nvidia, and even Indian companies like Infosys and Dr Reddy’s who have US presence.
Another member Sanjay Kallapur, professor of accounting at ISB, Hyderabad said that he strongly favours providing options for both functional classification and classification. Similarly, Sripriya Kumar, a member at NFRA and chairperson of ICAI’s AASB, stated that both functional and nature-wise classification options may be retained in the new standards.
Globally, there are two accepted formats to present expenses: natural and functional. While the natural format follows the nature of expenses such as salaries, materials cost, utilities, depreciation, etc; the classification of expenses by function follows major groupings of business activities such as manufacturing, marketing, administration, R&D, etc.
Though in an email response to FE, Narayanaswamy said both the functional and natural presentation formats provide useful information, and therefore, it would be good to have both.
The proposed effective date of Ind AS 118 is for annual reporting periods beginning on or after April 1, 2027.
In January 2025, the Institute of Chartered Accountants of India (ICAI) issued the exposure draft for Ind AS 118, and it was put in the public domain for about four months. However, during the consultation process, there was an apparent lack of input from actual users of financial statements, thereby raising doubts on its actual utility for the end users.
[The Financial Express]
