Restating Financial Statements for Alternative and Non-GAAPs: Worth the Effort (revisited)?

Abstract

In this study, I investigate whether restating financial statement data for other types of financial disclosures (e.g., footnotes to those statements and supplementary schedules in Form 10-K filings) produces differences in financial ratios as well as summary measures of economic resources and obligations. I provide evidence from univariate t-tests and Wilcoxon sign-ranked tests to test whether, even in the presence of high correlations, empirical evidence suggests that different financial ratios emerge after restating financial statement data for alternative and non-GAAPs.The restatements to financial statement data utilize alternative GAAPs (i.e., inventory cost flow and depreciation choices) and non-GAAPs (i.e., related to intangible capital, pension plans, OPEB plans, loss contingencies, and operating leases). The 10 adjustments of interest to this study are to the income statement (3 adjustments) and to balance sheet (7 adjustments) data. The results support the prediction that the restatements to income statement and balance sheet data lead to different financial ratios and summary measures than would otherwise be obtained from use of reported financial statement data.For example, Return on Assets, Return on Equity, Profit Margin, and Net Income are reliably different when income statement data are restated for alternative GAAPs (adjustments to as-if current cost-flow for COGS and as-if accelerated depreciation) and a non-GAAP (nonsmoothed pension cost). Thus, the evidence on signals of profitability and activity (Asset Turnover) suggest that restating income statement data for alternative and non-GAAPs may be informative for some decision-making contexts. Similar results exist from the restatements to balance sheet data. Signals of profitability, liquidity, activity, and solvency are reliably different even in the presence of high correlations between those signals that use reported versus restated financial data.The evidence suggests that users of financial statement data will likely find balance sheet restatements, in addition to income statement restatements to be useful in decision-making contexts. The evidence on the differences between financial ratios that use reported versus restated financial statement data suggests the most pronounced differences occur when the financial ratios utilize restated income statement and balance sheet data.