Mind the gap between GAAP and non-GAAP earnings ⚠️

It's not as simple as saying that non-GAAP accounting is bad 🧮

Publicly traded companies are required to report their quarterly financial statements following generally accepted accounting principles (GAAP), which the Financial Accounting Standards Board defines. Among other things, this standard makes it easier for investors to compare the financial performance of various companies.

GAAP allows for some flexibility in how companies do their books, including how they recognize revenue and accrue their expenses. The more liberties a company takes in its accounting, the more it may be accused of committing accounting shenanigans — or even outright accounting fraud.

Still, GAAP is often considered overly rigid: It forces companies to incorporate items that are arguably non-recurring or have values that can be very volatile over short periods. This has led many companies to report a second set of numbers adjusted for items that management argues don’t reflect the underlying, ongoing performance of the business. This process gets you to what are often referred to as operating earnings, adjusted earnings, pro-forma earnings, or non-GAAP earnings.

It’s a wonky topic with a lot of nuance.

However, most news coverage of earnings focuses on non-GAAP earnings. So it’s worth discussing some of the key issues.

Non-GAAP earnings usually look better than GAAP earnings 🧮