GAAP and Non-GAAP Earnings

GAAP and Non-GAAP are two different methods to record and report accounting information. GAAP refers to Generally Accepted Accounting Principles that are commonly accepted and are imposed on companies in order to provide investors consistent financial information, so they could examine the health of the company before investing. GAAP earnings refer to the earnings of a company as calculated by applying GAAP or Generally Accepted Accounting Principles.

Non-GAAP earnings refer to a company’s earnings calculated not according to the common accounting principles. It is an alternate measure of calculating earnings. Companies, however, are required to follow the GAAP rules that include revenue recognition, balance sheet item classification and outstanding share measurements. Only then can investors easily measure a company’s true progress before investing in it. However, companies claim that Non-GAAP accounting more accurately reflects their earnings and financial health.

Non-GAAP is often employed by companies to paint a rosy picture, and mislead investors. As there aren’t any specific rules governing this practice of accounting, there isn’t any uniformity in the information presented, which is necessary for investors to compare among industry measures. The information presented could be exaggerated and inaccurate. In other words, the Non-GAAP earnings of a company needn’t be its actual earnings. Such an accounting could omit many parameters demanded by the GAAP.

As auditors possess maximum freedom when the company employs Non-GAAP mode of accounting, investors need to exercise caution before they decide to invest. Though GAAP refers to generally accepted accounting principles, companies presenting GAAP earnings also need to be scrutinized, as figures could still be distorted by shrewd accountants.

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