Profit or loss? Measuring a company’s performance should be relatively simple. Generally accepted accounting principles, or GAAP, were the original standard guidelines for financial accounting. Yet more and more companies are resorting to non-GAAP metrics to present what can be a flattering picture of their performance.
All too often investors and analysts are forced to sort through metrics from an alternative reality, where earnings or profits are “adjusted”, “normalised” or “underlying”. The justification is usually that these figures give a better picture of the company’s real performance than statutory results. Sceptics say they are simply massaged to show them in the best possible light. It is telling that management’s remuneration is often tied to that “adjusted” performance.
The truth is accounting is rarely black and white. Companies have the right to present their earnings in the most attractive form, and accounting standards, the rules under which the game is played, give them the freedom to do so. There is also often valuable information to be gleaned from which measures executives choose. It is time for a return to a more objective measure. In 1996, around 60 per cent of S&P 500 companies reported at least one non-GAAP earnings-per-share figure. According to Audit Analytics, a US data analyst, by 2017 more than 97 per cent of S&P 500 companies used at least one non-GAAP metric in their financial statements.