Question

The topic last week was non-GAAP earnings. Find a company that has referenced non-GAAP earnings in its annual report or quarterly report. Please include the report as an attachment. Also, please identify your company, Name the company and briefly explain the company’s justification for using them.

What measures (for example, EBIT) and what adjustments were made to GAAP earnings to get to non-GAAP earnings.

Are the adjustments income increasing?

Do you think the non-GAAP adjusted earnings were more transparent and useful to investors? Why or why not – use specifics

Answer 1

You can refer to the financial statements for AT&T, LinkedIn, Microsoft, Proctor and Gamble to see that they are using Non GAAP adjusted earnings as well. There is a clear difference (an increase) in Earning per share for these companies. I can't add an attachment here so, please refer to their statements online.

For example, AT&T had EPS of $0.55 using GAAP and $0.72 using non GAAP for 2016 financial statements showing an increase by 32% approx.

Common adjustemts or removal of the following items are done from GAAP earning in order to reach Non GAAP earnings:

1. Depreciation and amortisation

2. Impairment of goodwill and property

3. Settlement and ligitation costs

4. Restructuring costs

5. Acquisation costs, etc.

So, adjustments from EBIT will be adding back Depreciation and amortisation to get to EBITDA (Earning before interest tax depreciation and amortisation) and non-cash charges for share based which is a non GAAP earning.

Non GAAP adjustments are NOT income increasing but most of the times the income soes increase. If we take the example of S&P 500 companies, more than 80% of them have seen an increase in their income. Although, it did decrease the income for remaining close to 20% companies. This is justified by the fact that there id greater probability of facing unexpected expenses than incomes which are non-recurring in nature.

The sole purpose of Non-GAAP adjusted earnings is to bring transparency to the financial statements and help the investors make better decisions based on such statements. But there are pros and cons for such adjustments. By excluding non-recurring expenses and incomes, company tend to show more accurate position to its stakeholders (example investors).

However, such adjustments can be unsuitable for the investors if the company is a huge debt organisation as we will be removing any interest component. As mentioned earlier, more often than not, the non GAAP earnings will be higher than normal statements, so companies use it for window dressing and trying to showcase a better position that what it actually is.

Also, non GAAP earning adjustments are not subject to GAAP, different companies use different methods and adjustments that suits them the best. So, it creates another problem to the investor - Comparability. Moreover, they also use different adjustments in different years making it more difficult to track the trend of a particular company.

Conclusion-The investor can not compare the financial statements using non GAAP adjustments - be it year to year of a particular company or different companies or different industries . They can only be used in conjunction with other statements prepared using GAAP to come to an appropriate decision.