Question

Find a company that has referenced non-GAAP earnings in its annual report or quarterly report, the report should be published in 2016 or 2017.

Please include the report as an attachment（can be a link. http://www.alibabagroup.com/en/news/press_pdf/p170518.pdf

1. please identify your company, Name the company and briefly explain the company’s justification for using them.

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

3.Are the adjustments income increasing?

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

Answer 1

1. It is not allowed to add pdf or word doc or link to share the financial statements of a company but you can refer to companies such as Proctor & Gamble, AT&T, facebook, etc which have used Non GAAP adjusted earnings in their Financial Statements. The justification for using non-GAAP adjustments is to give true and fair view of the financial statements to its stakeholders such as investors, owners, management, etc. as they remove any non - recurring adjustments.

2. Main adjustments that can be made to GAAP earnings to get to non-GAAP earnings are:

- Deprreciation and amortization

- Acquisation cost

- Restructuring cost

- Impairment of intangibles like goodwill

- Settlement costs

For example, in Alibaba group statements, share based compensation expense and amortization of intangible assets are added back to get to adjusted EBITA (refer to page 8).

3. Adjustments are not income increasing always. Although, generally we see the increase in income (EBITDA). As per the analysis of the financial statements for 2016, we see that over 80% of the S&P 500 companies have their adjusted non-GAAP earnings higher than GAAP earnings. We generally add/subtract any expenses/incomes which are unexpected or non-recurring. In most of the cases, companies incur unexpected losses rather than gains due to which in most of the cases, there is an increase. We see that close to 20% of the companies have shown a decline in non GAAP adjusted earnings.

4. The non GAAP earnings seems to be more transparent as they remove all unexpected transactions or non-recurring transactions to give the true and fair view of the financial statements by using only regular transactions during the year. This will definately help the investors to make their decisions more appropriately. But, the main disadvantage is that they are not governed by GAAP principles. So, all companies have different methodology of removing expenses or adding incomes. This makes it very difficult fo the investors to compane the statements of different companies or try to analyse a trend of a particular company.

Most of the times, EBITDA is used for adjustments so it excludes all interest expense. So, if a company has huge debt, it will not be showing a true position of the statement.

Window dressing becomes easy for companies making it more doubtful of the correct position of company in the minds of investors. So, it is most important that the investors use non-GAAP adjustment earnings along with other financial statements and do not base their decision in isolation!