Question

Microsoft announced that it expected the acquisition is to be accretive to non-GAAP earnings within two years. What does non-GAAP mean in this case? In other words: what major expense is excluded? How do you feel about the use of non-GAAP numbers in corporate communication? Is it legal? Please research FASB and SEC pronouncements on this issue, possibly including but not limited to Anders (2017), Golden (2017) and SEC (2018).

Answer 1

First question:

Non-GAAP in this case means an alternative method that is used to prepare the financial statements of an organization to show earnings and financial position of an organization. Thus, financial statements in such case and specifically the earnings are shown differently that using Generally Accepted Accounting Principles (GAAP).

Second question:

The following major expenses are excluded in non-GAAP earnings:

1. Large one off costs, i.e. non-recurring costs are excluded.
2. Asset write-down, organizational restructuring costs are excluded.
3. Other large non-recurring costs are also excluded to ensure there is no distortion of financial picture of an organization.

Third question:

Often the use non-GAAP method to show the earnings of an organization resulted in better portrayal of financial performance and position of an organization than using GAAP. This is because often expenses such organizational restructuring costs, asset write down often distort the financial performance as these are considered normal expenses under GAAP. Thus, use of non-GAAP numbers in corporate communication can b very effective to communicate the actual financial performance of an entity better.            

Fourth question:

It is definitely a legal practice to present earnings using non-GAAP method thus, there is nothing illegal about presentation of earnings using non-GAAP methods however, the organization must prepare financial statements using GAAP method in addition to non-GAAP methods.