Definition
Non-GAAP Earnings refer to an alternative method used by companies to calculate their income and earnings. It stands for Non-Generally Accepted Accounting Principles and differs from GAAP earnings by excluding certain expenses, income, and items to provide a more transparent view of the company’s profitability. Non-GAAP earnings are not standardized, so the calculations can vary greatly between companies and industries.
Phonetic
Non-GAAP Earnings: /nɒn -gæp/ /ˈɝ:nɪŋz/
Key Takeaways
- Non-Generally Accepted Accounting Principles (Non-GAAP) Earnings: These refer to a measure of an organization’s earnings that may not comply with what is generally acceptable by the GAAP. Companies often report this because it could give more accurate or beneficial information about their financial performance.
- Adjustments: Non-GAAP earnings usually take into account an array of one-time costs, such as restructuring costs, costs relating to a merger or acquisition, stock-based compensation, or other non-recurring expenses or incomes. Terms such as “adjusted earnings” or “cash earnings” are often used to indicate non-GAAP results.
- Regulation and Transparency: While using non-GAAP measurements is acceptable, it’s regulated by the SEC to ensure that investors are not misled. The reconciliation of GAAP and non-GAAP measures must be presented to make it easy for investors to compare the different measures.
Importance
Non-GAAP Earnings are important in business/finance because they provide a more transparent and clear view of a company’s operational performance, beyond what is usually provided by Generally Accepted Accounting Principles (GAAP). Non-GAAP measures exclude extraordinary items, one-time expenses, and non-cash charges like depreciation and amortization, therefore can give investors and analysts a better understanding of continuing and underlying profitability trends. As these measures are not standardized, they also allow companies to highlight specific information and align internal reporting with external reporting. However, due to the lack of standardization, they should be viewed in conjunction with GAAP metrics for a well-rounded evaluation of a company’s financial health.
Explanation
Non-GAAP earnings are used as a measure of a company’s operational performance that does not follow Generally Accepted Accounting Principles (GAAP). This measure seeks to provide a clearer insight into a company’s financial health by excluding extraordinary events or expenses that might skew the results if they were measured according to standard accounting rules. It can offer a more accurate, realistic picture of ongoing operations by adjusting for one-time, infrequent, or unusual events.Companies use Non-GAAP earnings in an attempt to provide investors and other stakeholders with a better understanding of their regular, ongoing performance. They may adjust their earnings for a myriad of reasons: to exclude the impact of large one-time charges (like a major lawsuit or restructuring), non-cash items such as stock-based compensation, or items that management feel are unrelated to the company’s core business operations. Ultimately, Non-GAAP measurements are used to provide a more transparent and comparable view of the company’s underlying performance. However, it’s also essential for investors to consider the GAAP-based earnings, as Non-GAAP earnings are supplemental and should not be seen as a replacement for GAAP.
Examples
1. Apple Inc.: In its quarterly earnings reports, Apple Inc. often includes non-GAAP earnings metrics that exclude stock-based compensation expenses. For instance, its per share earnings may be higher on a non-GAAP basis due to this exclusion. This enables the company to present its earnings in a more favorable light and provide investors with what it considers a more accurate picture of its operational profitability.2. Salesforce.com: This software company is known for providing non-GAAP earnings in its financial statements. Salesforce.com often adjusts its GAAP earnings to exclude the impact of items such as stock-based compensation expenses, amortization of purchased intangible assets, and acquisition-related expenses. The company asserts that this approach gives a more consistent portrayal of its operational performance.3. Amazon.com: In certain reporting periods, Amazon has utilized non-GAAP earnings, typically adjusting for factors such as the effects of certain investments, business acquisitions or restructuring. For example, Amazon might present a non-GAAP net income figure that excludes the costs related to acquiring another company. These adjusted metrics are meant to give investors a clearer view of Amazon’s underlying profitability, separate from strategic or one-time expenses.
Frequently Asked Questions(FAQ)
What are Non-GAAP Earnings?
Non-GAAP (Generally Accepted Accounting Principles) Earnings are financial measures reported by companies but not recognized in the official GAAP. They are often used by companies to provide a clearer picture of financial performance, excluding extraordinary events or expenses.
Why do companies report Non-GAAP Earnings?
Companies report Non-GAAP Earnings to accurately present their financial performance by excluding irregular items, allowing analysts and investors to better understand the underlying trends in a company’s performance.
Are Non-GAAP Earnings better than GAAP Earnings?
Neither is universally better. GAAP earnings often provide a more conservative view of a company’s financials, while Non-GAAP earnings may give a more accurate picture of its current operations. Both types are useful in different contexts, and analysts generally consider both when examining a company’s performance.
How are Non-GAAP Earnings calculated?
Procedures differ from company to company. Businesses typically start with GAAP earnings and make adjustments for specific items they believe will provide a clearer representation of operating performance. Some commonly adjusted items include: restructuring costs, stock-based compensation, or amortization expenses.
Is it mandatory for companies to report Non-GAAP Earnings?
No, it is not mandatory. However, if a company chooses to disclose Non-GAAP Earnings, it is required by the SEC to also present the most directly comparable GAAP measurements and reconcile the differences.
Can Non-GAAP Earnings be misleading?
There can be a risk. Since companies have discretion in what they exclude or include, this can sometimes result in manipulation of earnings presentation to artificially inflate performance. Therefore, Non-GAAP Earnings must be looked at in conjunction with GAAP Earnings and not as an isolated measure.
What is the role of SEC regarding Non-GAAP Earnings?
The Securities and Exchange Commission (SEC) provides guidelines and rules that companies must follow when presenting Non-GAAP financial measures in the U.S. The intention is to ensure that presentations are not misleading and the investors have helpful information.
Related Finance Terms
- Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
- Adjusted Earnings
- Pro Forma Earnings
- Operating Cash Flow
- Non-Operating Expenses
Sources for More Information
