Question

Ratio Analysis

You are not required to know generally accepted accounting principles (GAAP), as you are not studying to be an accountant. However, GAAP is important, as all publicly traded companies must use GAAP in their accounting and reporting practices. So, it is important to you, as a manager, for compliance reasons. Recognizing the existence of GAAP and the reasons for using non-GAAP reporting can be important to your job as a business manager.

For this discussion, read the articles and textbook page below, and then post a discussion of 3–4 paragraphs about GAAP and non-GAAP reporting. Consider as part of your post:

Your beliefs about the pros and cons of reporting company performance using non-GAAP measurements.

Answer 1

GAAP Reporting-

• GAAP was developed by the Financial Accounting and Standards Board (FASB) to standardize financial reporting and provide a uniform set of rules and formats to facilitate analysis by investors and creditors.
• GAAP created guidelines for item recognition, measurement, presentation, and disclosure.
• GAAP Reporting brings uniformity and objectivity to accounting improves the credibility and stability of corporate financial reporting, factors that are deemed necessary for optimally functioning capital markets.
• Companies can be compared against one another, results can be verified by reputable auditors, and investors can be assured that the reports are reflective of fundamental well-being.
• These reporting is adapted largely to protect investors from misleading or dubious reporting.

Non-GAAP Reporting-

• There are instances in which GAAP reporting fails to accurately portray the operations of a business.
• Companies are allowed to display their own accounting figures, as long as they are disclosed as non-GAAP and provide a reconciliation between the adjusted and regular results.
• Non-GAAP figures usually exclude irregular or noncash expenses, such as those related to acquisitions, restructuring or one-time balance sheet adjustments.
• This smooths out high earnings volatility that can result from temporary conditions, providing a clearer picture of the ongoing business.
• Forward-looking statements are important because valuations are largely based on anticipated cash flows.
• However, non-GAAP figures are developed by the reporting company, so they may be subject to situations in which the incentives of shareholders and corporate management are not aligned.

Pros and Cons of reporting company performance using non-GAAP measurements.

Pros of reporting company performance using non-GAAP measurements-

• Non-GAAP earnings are an alternative method used to measure the earnings of a company. Many companies report non-GAAP earnings in addition to their earnings as calculated through GAAP.
• Companies may supplement GAAP earnings with non-GAAP measures.
• Some asset managers believe that these alternate figures provide a more accurate measurement of the company's financial performance.
• Non-GAAP results from responsible firms grant investors unparalleled insight into the methodology employed by management teams as they analyze their own companies and plan future operations.

Cons of reporting company performance using non-GAAP measurements.

• The Security and Exchange Commission’s (SEC) Regulation G prohibits the dissemination of false or misleading GAAP or non-GAAP financial measures.
• The SEC updated its guidance in 2010 and, most recently, in May 2016 through Compliance and Disclosure Interpretation (C&DI) documents.
• Non identification of misleading or incomplete non-GAAP results becomes more important as those numbers diverge from GAAP.
• Non-GAAP figures that merely adjust for equity compensation are less likely to provide actionable data.

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