Accounting

Non-GAAP Measures Expanding in Volume and Scope

By Dave Pelland With the use of non-GAAP measures expanding in volume and creativity, a CFRI panel reviewed how the reporting landscape has shifted in the wake of Securities and Exchange Commission guidance in May calling for greater consistency and transparency in financial reporting.   Mark Kronforst, Chief Accountant in the SEC’s Division of Corporation Finance, said the commission issued the guidance as differences in GAAP and non-GAAP reporting widened.   “We had noticed some practices that we found troubling… We issued the guidance and then we'd withheld any comments on filings until companies had a chance to implement the guidance or to react to it,” Kronforst said.   “Our process of issuing guidance, stepping back, and allowing companies to react before we comment really worked well in this situation, and we thought it was great that companies took the guidance to heart and made changes to correct a lot of troubling practices that we had seen developed.”   Non-GAAP measures can be useful to investors and other stakeholders by providing additional context about a company’s performance, and potentially a clearer alignment with management’s objectives in running and evaluating the company.    “The information that is in the different values between GAAP and the non-GAAP measure have always been extraordinarily useful to us,” said Mark LaMonte, Managing Director of Moody's Investors Service. “They're very helpful to us to take part of financial results and analyze what is really going on in the company.”   “What happens, though, is those numbers end up in headlines and get picked up as prominently, sometimes, as the GAAP measures, or get presented by the companies themselves more prominently than the GAAP measures. If we lose the in-between, if we lose that valuable information about what's really going on with the company, then we have lost valuable information content.”   The SEC’s Kronforst said non-GAAP measures can play a legitimate role, as long as companies explain their decisions clearly and approach their non-GAAP measures consistently. For instance, a number of companies within specific industries define non-GAAP measures in the same way to promote comparisons within company results.   “Most of the attention is on tailored accounting principles,” Kronforst said....

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