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Non-GAAP Reporting

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Financial Statements

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Abstract

By their very nature, non-GAAP metrics are not standard, and therefore can be misleading to financial statement readers. Given that non-GAAP metrics are disclosed in Form 10-Q and Form 10-K, they have become part of the financial statements, merely ignoring them is not the proper answer. Non-GAAP financial measures that include or exclude unusual expenses or gains may provide a misleading financial picture. The Securities and Exchange Commission has recently issued a cautionary release on non-GAAP financial measures, and has proposed rulemaking pursuant to the Sarbanes–Oxley Act.

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Notes

  1. 1.

    David Trainer (2016): SEC Starting to Worry About Non-GAAP Earnings, Forbes.com.

  2. 2.

    A. Jagannath and T. Koller (2013): Building a Better Income Statement, November, www.mckinsey.com.

  3. 3.

    https://www.pwc.co.uk/services/risk-assurance/insights/meet-the-experts-conference/non-gaap-measures-old-new-problem.html.

  4. 4.

    Dirk E. Black (2017): Non-GAAP Reporting: Evidence from Academia and Current Practice, Journal of Business Finance & Accounting; Tuck School of Business Working Paper No. 2966778, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966778.

  5. 5.

    Bill Klein (2017): Important Considerations When Using Non-GAAP Measures, Accounting, CFO.

  6. 6.

    F. Ryan Castillo (2017): Non-GAAP Explained, International Financial Law Review, p. 21.

  7. 7.

    Bob Halsey and Ginny Soybel (2002): All About Pro Forma Accounting, The CPA Journal.

  8. 8.

    F. Heflin, C. Hsu, and Q. Jin (2015): Accounting Conservatism and Street Earnings, Review of Accounting Studies, Vol. 20, No. 2, pp. 674–709.

  9. 9.

    Nilabhra Bhattacharya (2003): Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and GAAP Operating Earnings, Journal of Accounting and Economics, Vol. 36, No. 1–3, pp. 285–319.

  10. 10.

    Bob Halsey and Ginny Soybel (2002): All About Pro Forma Accounting, The CPA Journal.

  11. 11.

    F. Heflin, C. Hsu, and Q. Jin (2015): Accounting Conservatism and Street Earnings, Review of Accounting Studies, Vol. 20, No. 2, pp. 674–709.

  12. 12.

    David H. Sherman and S. David Young (2018): The Pitfalls of Non-GAAP Metrics, MIT Sloan-Management Review, https://sloanreview.mit.edu/article/the-pitfalls-of-non-gaap-metrics/#article-authors.

  13. 13.

    Charles Mulford and Alex Pfeffer (2016): Corporate Reporting of Non-GAAP Earnings and SEC Compliance, International Research Journal of Applied Finance, Vol. 7, pp. 114–136.

  14. 14.

    Daniel Reimbach and Zeitschrift fur Betriebswirtschaft (2014): Pro Forma Earnings Disclosure: The Effects of Non-GAAP Earnings and Earnings on Before Investors’ Information Processing, Journal of Business Economics; Heidelberg Vol. 84, No. 4, pp. 479–515.

  15. 15.

    Jack T. Ciesielski (2018): Accounting’s Tower of Babel: Key Considerations in Assessing Non-GAAP Earnings, Financial Analysts Journal; Charlottesville Vol. 73, No. 2, pp. 34–50.

  16. 16.

    Jeffrey S. Miller (2008): Opportunistic Disclosures of Earnings Forecasts and Non-GAAP Earnings Measures, Journal of Business Ethics, suppl. Supplement: JBE; Dordrecht Vol. 89, pp. 3–10.

  17. 17.

    R. M. Bowen, A. K. Davis and D. Matsumoto (2005): Emphasis on Pro Forma Versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC Intervention, and Market Reactions, The Accounting Review, Vol. 80, No. 4, pp. 1011–1038.

  18. 18.

    T. Linsmeier (2016): Revised Model for Presentation in Statements of Financial Performance: Potential Implications for Measurement in the Conceptual Framework, Working paper.

  19. 19.

    Russell G. Golden (2017): Reducing Unnecessary Complexity in Financial Reporting, FASB.

  20. 20.

    Moody’s Service Investors (2014): Leveraged Finance—EBITDA: Used and Abused, p. 5.

  21. 21.

    Idem.

  22. 22.

    Berman Karen and Joe Knight (2009): How EBITDA Can Mislead, Harvard Business Review, https://hbr.org/2009/11/how-ebidta-can-mislead.

  23. 23.

    David H. Sherman and S. David Young (2016): Where Financial Reporting Still Falls Short, Finance and Accounting (July–August 2016), https://hbr.org/search?term=s.%20david%20young.

  24. 24.

    H. Hoogervorst (2016): Performance Reporting and the Pitfalls of Non-GAAP Metrics, http://www.ifrs.org/About-us/IASB/Members/Documents/Hans-Hoogervorst-EAA-Annual-Conference-11-May-2016.pdf.

References

  • A. Jagannath and T. Koller (2013): Building a Better Income Statement, November, www.mckinsey.com.

  • Berman Karen and Joe Knight (2009): How EBITDA Can Mislead, Harvard Business Review, https://hbr.org/2009/11/how-ebidta-can-mislead.

  • Bill Klein (2017): Important Considerations When Using Non-GAAP Measures, Accounting, CFO.

    Google Scholar 

  • Bob Halsey and Ginny Soybel (2002): All About Pro Forma Accounting, The CPA Journal, http://archives.cpajournal.com/2002/0402/nv/402nv4.htm

  • Charles Mulford and Alex Pfeffer (2016): Corporate Reporting of Non-GAAP Earnings and SEC Compliance, International Research Journal of Applied Finance, Vol. 7, pp. 114–136.

    Google Scholar 

  • Daniel Reimbach and Zeitschrift fur Betriebswirtschaft (2014): Pro Forma Earnings Disclosure: The Effects of Non-GAAP Earnings and Earnings on Before Investors’ Information Processing, Journal of Business Economics; Heidelberg Vol. 84, No. 4, pp. 479–515.

    Google Scholar 

  • David H. Sherman and S. David Young (2016): Where Financial Reporting Still Falls Short, Finance and Accounting (July–August 2016), https://hbr.org/search?term=s.%20david%20young.

  • David H. Sherman and S. David Young (2018): The Pitfalls of Non-GAAP Metrics, MIT Sloan-Management Review, https://sloanreview.mit.edu/article/the-pitfalls-of-non-gaap-metrics/#article-authors.

  • David Trainer (2016): SEC Starting to Worry About Non-GAAP Earnings, Forbes.com.

  • Dirk E. Black (2017): Non-GAAP Reporting: Evidence from Academia and Current Practice, Journal of Business Finance & Accounting; Tuck School of Business Working Paper No. 2966778, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966778

  • F. Heflin, C. Hsu, and Q. Jin (2015): Accounting Conservatism and Street Earnings, Review of Accounting Studies, Vol. 20, No. 2, pp. 674–709.

    Article  Google Scholar 

  • F. Ryan Castillo (2017): Non-GAAP Explained, International Financial Law Review, p. 21.

    Google Scholar 

  • H. Hoogervorst (2016): Performance Reporting and the Pitfalls of Non-GAAP Metrics, http://www.ifrs.org/About-us/IASB/Members/Documents/Hans-Hoogervorst-EAA-Annual-Conference-11-May-2016.pdf.

  • Jack T. Ciesielski (2018): Accounting’s Tower of Babel: Key Considerations in Assessing Non-GAAP Earnings, Financial Analysts Journal; Charlottesville Vol. 73, No. 2, pp. 34–50.

    Google Scholar 

  • Jeffrey S. Miller (2008): Opportunistic Disclosures of Earnings Forecasts and Non-GAAP Earnings Measures, Journal of Business Ethics, suppl. Supplement: JBE; Dordrecht Vol. 89, pp. 3–10.

    Google Scholar 

  • Nilabhra Bhattacharya (2003): Assessing the Relative Informativeness and Permanence of Pro Forma Earnings and GAAP Operating Earnings, Journal of Accounting and Economics, Vol. 36, No. 1–3, pp. 285–319.

    Article  Google Scholar 

  • R. M. Bowen, A. K. Davis and D. Matsumoto (2005): Emphasis on Pro Forma Versus GAAP Earnings in Quarterly Press Releases: Determinants, SEC Intervention, and Market Reactions, The Accounting Review, Vol. 80, No. 4, pp. 1011–1038.

    Article  Google Scholar 

  • Russell G. Golden (2017): Reducing Unnecessary Complexity in Financial Reporting, FASB.

    Google Scholar 

  • T. Linsmeier (2016): Revised Model for Presentation in Statements of Financial Performance: Potential Implications for Measurement in the Conceptual Framework, Working paper.

    Google Scholar 

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Authors and Affiliations

  1. Fordham University, New York, NY, USA

    Felix I. Lessambo

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  1. Felix I. Lessambo
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Correspondence to Felix I. Lessambo .

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Lessambo, F.I. (2022). Non-GAAP Reporting. In: Financial Statements. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-15663-2_24

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  • DOI: https://doi.org/10.1007/978-3-031-15663-2_24

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