Profit or Prophet? A Case Study of the Reporting of Non-GAAP Earnings by Australian Banks

Abstract

Australian firms increasingly highlight earnings results that do not conform to the definition of profit under generally accepted Australian accounting principles (GAAP). We compile a detailed description of the differences between GAAP and non-GAAP earnings for each of the four largest Australian trading banks for the years 2003 to 2008. Our evidence shows that each of the major banks has a history of reporting what are typically termed ‘cash earnings’ or ‘underlying earnings’. However, the definition of these terms is not consistent between banks, nor does it appear to be consistently applied by individual banks over time. Interestingly, the switch to Australian International Financial Reporting Standards has a noticeable impact on the definition of non-GAAP earnings. The data we summarise raises questions about the role of GAAP earnings versus non-statutory definitions of financial performance voluntarily provided by firms themselves. More broadly, the ability of firms to ‘self-define’ outcomes presents a significant challenge to capital market regulators such as the Australian Securities and Investments Commission.