Last month we published an in-depth look at non-GAAP reporting of net income, examining the earnings releases of 816 companies that included some non-GAAP measure of their 2015 profits. The headline was that non-GAAP metrics led to net income $164.1 billion higher than net income according to “traditional” Generally Accepted Accounting Principles.
The eagle-eyed Jack Ciesielski, publisher of the Analyst’s Accounting Observer and an expert on non-GAAP data, discovered we had some duplicate listings in our original data—not enough to change any of our conclusions about what is driving non-GAAP net income (adjustments for equity pay, acquisition costs, and restructuring charges), nor about which industries account for the largest amount of adjustments (finance and IT).
Still, Ciesielski is one of the sharpest thinkers about financial reporting out there. So when he questioned our data, we decided to do a close look at non-GAAP net income specifically among the S&P 500 and compare that to the $164.1 billion we originally found.
Yep, we were wrong—just among the S&P 500 alone, non-GAAP net income is actually way higher.
Those non-GAAP adjustments increased reported net income by $202.1 billion. Average adjustment was an increase of $582.6 million, and the prize for largest increase goes to Apache Corp., which adjusted its net income upward by $22.99 billion.
An honesty award goes to Berkshire Hathaway, whose non-GAAP net income adjusted the numbers downward by $6.7 billion. In fact, 41 of the S&P 500 published non-GAAP net income that led to lower numbers than traditional GAAP.
As always, we stress that non-GAAP metrics are not prohibited by federal securities law. A company must simply demonstrate that the non-GAAP metric it wants to use does indeed convey useful information to investors, and it also must reconcile that non-GAAP metric back to the closest comparable GAAP measurement. (In this instance, non-GAAP net income must be reconciled to net income.)
Calcbench has been calculating our non-GAAP estimates by looking at those reconciliation statements. Our original report, examining 816 filers and arriving at the $164.1 billion number, included some of the S&P 500, but not all. The $202.1 billion is for the 500 companies currently in the S&P 500.
The Securities and Exchange Commission has been talking about non-GAAP for most of this year, warning that companies have taken the practice too far—either by concocting non-GAAP metrics that don’t convey useful information, or by stressing those non-GAAP metrics over traditional GAAP. (“Excluding reality, we had a great quarter!”) In May the SEC published fresh guidance on what is permissible, and we expect more discussion throughout 2016. Calcbench, of course, will be follow it all closely.
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