Importance Of Non-GAAP Earnings In Financial Reporting

Aim and Motivation of the Research

Discuss about the Accounting in Business Research Methods for GAAP Financial Measures.

According to Skadden et al. (2012), companies generally supplement their projection of reported earnings as per U.S. “Generally Accepted Accounting Principles (GAAP)”, but very often, it has been found that with the inclusion of non- GAAP Financial measures the company’s operations and financial position can be assed in a better way by the investors. A non-Financial measure is known as the numerical measure, which has been derived from the company’s historical or the future financial performance, cash flows and financial position that may be comparable to the GAAP measures. The enforcement of this concept emphasizes the companies to include adjusted earnings, which is also known as “pro forma earnings”, or the “Non-GAAP earnings”. Hence this report intends to shows the importance of the declaration of the “Non-GAAP earnings” and study about the implications.

Aims

The report aims to show how the disclosure of “Non-GAAP” Earnings is more persistent than the GAAP Earnings. The report also highlights on the characteristics laid down by IASB conceptual framework, which shows how the consideration of pro-forma earnings may improve the quality of financial reporting.

Motivation for the research

The GAAP Accounting standards are known to offer uniformity in reporting of financial performance of the company however, the reporting standard may exclude the income statements ongoing performance of the company’s underlying operations. This may include restructuring the company’s operations or writing down the value of assets. The large one-time costs are often known to interfere with companies profit as a result many medium-sized companies are known to provide adjusted earnings as a measure to exclude the non-recurring items (Business Insider. 2016). Hence the report aims to provide the rationale for including the different types of the underlying operations of the “Non-GAAP” financial report (Curtis et al. 2013).

• The main objective of the report depicts the implications of the GAAP and “Non-GAAP” accounting standards on the financial statement.
• The objectives also include to show the present guidelines provided in the GAAP financial reporting and the scope to include fairness in the reporting standards with the inclusion of the non-GAAP financial reporting.
• The study intends to show the effectiveness of the non-GAAP components in Small and medium enterprises which comply with the GAAP standards.
• The main point highlighted in the research study will be related to the use of the decision-making and the ethical use of the GAAP and the non-GAAP component of the financial statement. 

Background

As discussed by Johnson et al. (2014), the research shows how the disclosure of “Non-GAAP” earnings is useful to the investors in prediction of future earnings. The research deals with disclosure of this information is particularly beneficial to the equity investors as it includes the cross-sectional variations by assessing the nature of the solutions made regarding what is transitory versus recurring. The study further shows how with the inclusion of “Non-GAAP” earnings, the Investors can be supplemented with useful information for earnings before interest, income taxes, depreciation, amortization and stock compensation (EBITDAS).

Research Objectives

Literature Review

According to Malone et al. (2016), the various types of implications in the disclosure of non-gap earnings will help the analysts to understand the organizations performance, financial condition and cash flows in a better way. Hence the study proves to show, how the inclusion of non-pro forma earnings leads to less error in the forecasted value and dispersions in the following year.

The research further shows how the use of non-gap earnings should caution the investors in the fundamental analysis and the company should declare that the various assumptions are based either on the historical data or on the future measures, which are non-compliant with any standardized rules or regulations as per stated under GAAP (Venter et al. 2014).

Some of the problems and the research topics are relevant to the present assignment are based on the following questions prepared for the purpose of the report:

• What are the contemporary issues in the present GAAP standards of the financial reporting?
• What are the essential disclosures made in the “Non-GAAP” financial reporting?
• What are the essential disclosures made in the “Non-GAAP” financial reporting that is not present in the GAAP accounting standards?
• Who will benefit from the disclosure made in the “Non-GAAP” financial reporting?

Research Design

The main considerations are based on the qualitative and explanatory research method, which shows the inclusion of “Non-GAAP” Earnings in an organization’s depreciation, merger costs, taxes, interest, goodwill and stock based employee pay.

The main method used for the collection of the data is based on the qualitative analysis of the several issues discussed in the contemporary accounting. The research methodology is based on the gathering of the data from the different sources in order to know about the various components of the “Non-GAAP” financial reporting. The methodology is used to address the various types of the research questions framed in the assignment. The different types of the measures considered for the methodology includes the scope of the open-ended questions asked to the management accountants. This is useful for considering the qualitative aspects of the research data.

Data collection method

Source of the data:

Primary Data

The primary data collection is based on the interview conducted from the different investors of the selected company and the financial investors.

Secondary Data

The decision to show the usefulness of disclosing “Non-GAAP” earnings is based on journals, articles, websites and annual reports of company. Some of the journals reviewed to show the rationale of going in favor of the “Non-GAAP” financial measures decisions are based on “The Impact of the FMA Guidelines of “Non-GAAP” Earnings Disclosures” by “Elizabeth A. Rainsbury”, “IFRS “Non-GAAP” earnings disclosures and fair value measurement” by “Lance Malonea, Ann Tarcab and Marvin Weeb”. Reviewing of articles such as “Corporate Finance Alert” by “Skadden, Arps, Slate, Meagher & Flom LLP”.

The main source of information will be extracted from studying the non-gap financial exposures from the annual report of Perficient Inc. for the year 2014. This report clearly shows the use of reconciliation of GAAP to “Non-GAAP” measures. Analysis of the annual report shows the relevance of “Non-GAAP” financial exposure in terms of EBITDA, in the net income section of the company.

Figure 1: Non- GAAP financial measures in adjusted net income

(Source: Phx.corporate-ir.net. 2016)

Figure 2: Non- GAAP financial measures in EBITDAS

(Source: Phx.corporate-ir.net. 2016)

The data analysis technique is based on the use of simple random and convenience sampling. The simple random sampling technique is ideal for the financial analysts following the GAAP reporting standards and the collection of the sampling data is based on both positive and negative responses related to the benefits of the disclosure of the “Non-GAAP” financial earnings.

The convenience sampling method is ideal for the easy to reach investors of the Perficient Inc.

As stated by Rainsbury and Hart (2014), In order to prevent misleading the user’s indication of non-gap information some of the key considerations to be made in the research study are listed below as follows:

Moreover, it has to be considered in the research study once the GAAP measures are applied to the assets and other items, the consideration of positive pro forma earnings can become negative.

Reference List

Business Insider. (2016). CHART OF THE DAY: Here’s How You Should Think About ‘Adjusted’ Earnings. [online] Available at: https://www.businessinsider.in/CHART-OF-THE-DAY-Heres-How-You-Should-Think-About-Adjusted-Earnings/articleshow/27979957.cms [Accessed 15 Aug. 2016].

Curtis, A.B., McVay, S.E. and Whipple, B.C., 2013. The disclosure of “Non-GAAP” earnings information in the presence of transitory gains. The Accounting Review, 89(3), pp.933-958.

Johnson, A., Percy, M., Stevensonâ€ÂClarke, P. and Cameron, R., 2014. The Impact of the Disclosure of Nonâ€ÂGAAP Earnings in Australian Annual Reports on Nonâ€ÂSophisticated Users. Australian Accounting Review, 24(3), pp.207-217.

Malone, L., Tarca, A. and Wee, M., 2016. IFRS nonâ€ÂGAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), pp.59-97.

Phx.corporate-ir.net. (2016). Perficient – Investor Relations – Financial Reports. [online] Available at: https://phx.corporate-ir.net/phoenix.zhtml%3Fc%3D83872%26p%3Dirol-reports [Accessed 15 Aug. 2016].

Rainsbury, E.A. and Hart, C., 2014. The Impact of the FMA Guidelines of Non-GAAP Earnings Disclosures. Unpublished working paper.

Skadden, A., Slate, M. and Flom, L.L.P., 2012. Corporate Finance Alert.

Venter, E.R., Emanuel, D. and Cahan, S.F., 2014. The Value Relevance of Mandatory Nonâ€ÂGAAP Earnings. Abacus, 50(1), pp.1-24.

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