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You are the Chief Financial Officer for Bio Innovations, a private company operating since 1993. Bio develops and markets cancer drugs, and recently became a cloud provider for medical centers. You recently joined the company and have been encouraging the founder and executive chair, Mary Cooper, to take the company public. Mary is reluctant to do that primarily because of the nature of the business and her belief that GAAP financial statements place the company in an unfavorable position, especially against the background of its significant research and development expenditure that is expected to continue for the foreseeable future. Mary met an investment banker during her recent family vacation and immediately called you into her office on her return to tell you of the interaction with the banker who mentioned something to her about non-GAAP reporting. Mary is unsure of what he meant by non-GAAP reporting and how such reporting would create a favorable position for Bio, were it to go public. She is also fearful that she would face penalties if a publicly listed Bio engaged in what seems like a dubious reporting practice. Mary reluctantly asks for your advice as the investment banker is encouraging her to take the company public and wants to make a formal presentation to Bio’s board on going public You are excited to hear about this development as the main reason you joined the company is that you felt it was an excellent candidate for a listing on the New York Stock Exchange. Further, your involvement would be a major career achievement. Required: Write a memo to Mary to update her on non-GAAP reporting, allay her concerns and prepare her for the upcoming meeting with the investment banker. Restrict you memo to non-GAAP reporting and related matters.

Answer 1

MEMO

To:
Mary Cooper
Executive chair

From:
(Name)
Chief Financial Officer

Date: 30 April 2020

Re: Comments on non- GAAP reporting.

Dear Madam,

Regarding Non- GAAP reporting i would like to share the following points before taking a decision on it. The concept of non-GAAP reporting is for measuring the profit of a company without following accounting standards. It is an alternative method used to measure the performance of the company. And it should be logically suitable for the company and also it should be for presenting the true picture of the company. Mostly investors look at the non GAAP reports also before taking decisions, as these normally ignore irregular or non cash expenses. but on the other hand if we are following GAAP, it is legal and standardized. it makes comparison with other companies easy and it might be approved by auditors. so people rely on it because it should not be a dubious reporting.

The Security and Exchange Commission allows submission of a non GAAP report along with the public disclosure, but it should comply with some strict requirements. it require to provide reconciliation to comparable numbers, the reason to provide non GAAP numbers and also the presentation format. And in any situation it become misleading then we may face enforcement action from SEC and other regulatory authorities. And it should have greater or more prominence that GAAP. There are many risks in constant currency, and this method ignore recurring expenses.

Even though non GAAP reporting have some benefits, it is tailor made rule and if any misleading fact included, it will adversely affects the company. And when it goes to public it may create a bad impact as it is excludes charges but will not exclude any gains. So for comparison purpose and legal concerns, i prefer to follow GAAP reporting. Or if we are going with this, it require a strict internal controls, a properly defined policies for non GAAP adjustments, also need to ensure that they are comply with SEC regulations.

Respectfully,
(Name)