When reading financial statements, you might notice stated GAAP vs. non-GAAP values. The United States requires all public corporations to follow widely accepted accounting rules (GAAP). These concepts are used to construct financial statements that are filed quarterly. Many businesses decide to publish their own non-GAAP financials as well.
An introduction To GAAP
The Financial Accounting Rules Board (FASB) as well as the U.S. Securities and Exchange Commission both developed and oversaw GAAP accounting standards (SEC). To establish a consistent method of gauging a company’s financial health, GAAP standards were developed. GAAP guidelines require:
- How a business can account for sales and expenses.
- What expenses must be classified as assets and capitalized.
- How information is provided in an audited report to shareholders.
- What information must be available in the financial statements’ notes.
- Although we’ll concentrate on public firms in this article, GAAP is also used by private organizations with audited financials.
Both investors and auditors can benefit greatly from GAAP. These standards prevent you from having to learn an entirely new accounting and presentation system for each and every organization. Although there will undoubtedly be changes between industries, you may anticipate that the accounting information of related organizations will appear and feel alike.
But there are restrictions. In some cases, GAAP reporting doesn’t provide investors with a complete picture of a company’s current situation or long-term prospects. In that case, the business may decide to report non-GAAP earnings.
An Introduction To Non-GAAP
Non-GAAP accounting is a change to previously reported data, whereas GAAP accounting encompasses the complete accounting activities from processing an invoice to producing financial statements. You shouldn’t be concerned that a business that uses non-GAAP accounting uses entirely distinct books to calculate its non-GAAP net revenue. The GAAP and non-GAAP financial data for the company ought to be fairly simple to reconcile.
Although GAAP was formed by the FASB and is updated by them, non-GAAP standards have no single inventor. Non-GAAP financial statements are still subject to SEC regulation, though. In fact, the SEC has previously taken legal action against businesses it considers to be overly aggressive with non-GAAP data.
Operating profits, taxes, depreciation, and amortization, or EBITDA, is among the most popular non-GAAP accounting measurements. Most businesses include information about EBITDA in their financial statements and press releases. Although this isn’t a legitimate GAAP figure for income, it does make comparing revenue to the previous year and from the next, business to firm a little bit simpler.
When using EBITDA, you wouldn’t have to be concerned about if a company increased its debt load, which would otherwise reduce income due to interest expenditure.
In fact, not all non-GAAP (also known as pro forma) income reports are as simple as this. Companies will alter net income in a variety of ways to make it appear better.
Depreciation will be added back because it is a non-cash expense. Restructuring fees will be added back in and will be described as one-time only. If insurance firms believe that catastrophic losses are unlikely to occur again, they will add them back. Some businesses even make adjustments to the stated numbers of a recently acquired company to take out costs they anticipate would be cut due to “synergy.”
Why do companies take Non-Gaap measures?
The argument for reporting non-GAAP results is that significant one-time expenses, like asset write-downs or organizational reorganization, shouldn’t be regarded as typical operating expenses because they skew an organization’s underlying financial performance.
In many instances, both GAAP and non-GAAP results are significant, and research from scholarly and professional sources supports this claim. The precise exclusions in adjusted data should be taken into account by investors who are compelled to pick a side as that of the two diverge. Plus, to learn more about GAAP vs NON-GAAP, head over to Dilligent’s website where you’ll get a detailed overview of how this works. What makes companies choose a side here and what are the perks that are offered. And if you get this all for free and an easily communicated language, what are the odds then? Head over now!