Lesson 4 of 8 · All lessons in this module
- Reporting quality, earnings quality and the quality spectrum
- Conservative versus aggressive accounting
- Why managers misreport, and what keeps them honest
- Presentation choices and non-GAAP measures
- Accounting choices and estimates that manage earnings and the balance sheet
- Integrated cases: what accounting choices do to the numbers
- Choices that affect operating cash flow
- Warning signs and how to detect manipulationVideo lesson
Lesson 4 of 8 · 13 min
Presentation choices and non-GAAP measures
Managers can shape an analyst's view without changing a single recognised number, by choosing what to emphasise, how to segment results and which adjusted ('non-GAAP') measures to put in the headline.
In short
- Non-GAAP financial measures (also called pro forma, adjusted, underlying, core or recurring earnings, or alternative performance measures) adjust standards-based figures by excluding required items or including disallowed ones.
- Non-GAAP operating metrics (subscribers, active users, occupancy) do not come from the financial statements.
- EBITDA and company-specific adjusted EBITDA strip out depreciation, amortisation and items such as restructuring, impairments, share-based pay, litigation and debt-extinguishment gains or losses.
- Using non-GAAP measures to steer attention away from weak GAAP results is an aggressive presentation choice; excluding negative items is the typical sign.
- SEC: show the comparable GAAP measure with equal prominence, provide a reconciliation, explain usefulness. No smoothing of 'non-recurring' items that are likely to recur within two years; no excluding cash-settled charges from liquidity measures (other than EBIT and EBITDA). IFRS: define, explain relevance and reconcile. ESMA guidelines cover APMs in the EU.
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