Abstract
Generally accepted accounting principles (GAAP) provide for a standardized method of calculating va-rious performance measures, such as net income, in-come from continuing operations, and cash flow from operations. There are two primary sources of GAAP – the International Financial Reporting Standards (IFRS), as developed by the International Accounting Standards Board (IASB), and the U.S. GAAP, as developed by the Financial Accounting Standards Board (FASB). Howe-ver, non-GAAP performance measures have been repor -ted by companies for several decades, as an alternative to these GAAP measures. Managers argue that these non-GAAP measures improve the information about the core earnings of their companies. Company mana-gers have discretion in determining what is included and what is not included in the calculation of these non-GA -AP performance measures. In this essay, I review non--GAAP reporting, make a call for the ethical reporting of non-GAAP performance measures, and make recom-mendations for ways to improve non-GAAP reporting.
Highlights
Since 2001, the U.S Securities and Exchange Commission (SEC) has expressed concern about the potential for non-Generally accepted accounting principles (GAAP) earnings disclosures to mislead investors (Dow Jones & Company, 2001; Securities and Exchange Commission, 2001a, 2001b)
While non-GAAP earnings figures may not be credible to all financial statement users, prior research suggests that some stakeholders rely heavily on non-GAAP earnings (Frederickson & Miller, 2004; Elliot, 2006; Bhattacharya, Black, Christensen, & Mergenthaler, 2007)
In response to fears that companies could use non-GAAP earnings disclosures to mislead investors, the SEC issued a warning to investors about the potential dangers of relying on pro forma earnings figures in December 2001
Summary
Since 2001, the U.S Securities and Exchange Commission (SEC) has expressed concern about the potential for non-GAAP earnings disclosures to mislead investors (Dow Jones & Company, 2001; Securities and Exchange Commission, 2001a, 2001b). Prior research debates whether these ‘manager-customized’ earnings provide investors with a clearer picture for forecasting future operating performance (not conveyed by GAAP earnings) or portray an overly optimistic depiction of performance (Bhattacharya, Black, Christensen, & Larson 2003; Curtis, McVay, & Whipple, 2014) This skepticism about non-GAAP reporting stems from the fact that these earnings disclosures are not audited, allow managers increased discretion in providing non-standard performance metrics. As an example of the extreme nature of some of these non-GAAP disclosures, recently one company provided 11 different non-GAAP financial measures This company presents the following financial measures to supplement its Consolidated Financial Statements, which are prepared in accordance with the IFRS.
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