Placeholder Image

字幕表 動画を再生する

  • Welcome to the Finance Storyteller series!

  • In this video I am going to discuss

  • GAAP versus non-GAAP metrics,

  • which is the hottest topic

  • in financial reporting.

  • It affects the very core of a company:

  • what is the reality of its financial performance?

  • GAAP versus non-GAAP discussions impact investors,

  • analysts, financial journalists, company leadership,

  • employees, the audit committee and external auditors.

  • A lot is at stake here!

  • Here's an overview of how this video is built up,

  • so you can make your choice of watching

  • it all the way through from beginning to end,

  • or jumping straight to the part that is of

  • particular interest to you.

  • First section: What does GAAP mean,

  • and what is non-GAAP?

  • Basically: why should I care?

  • Second section:

  • What are "common" non-GAAP metrics?

  • What does it look like?

  • Third section:

  • Why are there concerns about non-GAAP reporting?

  • Fourth section:

  • Which guidance have regulators issued

  • to improve transparency?

  • GAAP means Generally Accepted Accounting Principles,

  • more specifically US GAAP (the accounting

  • standards used in the US) or IFRS

  • (the International Financial Reporting Standards used in

  • 126 other countries across the world).

  • Using GAAP provides uniformity

  • in how companies report their financial performance.

  • Having accounting standards like US GAAP and IFRS

  • enables you to compare the performance

  • of companies within and across economic sectors,

  • so the standards are necessarily

  • generic in nature.

  • GAAP numbers should be neutral,

  • comparable and verifiable, and provide information that

  • markets can trust.

  • Non-GAAP metrics are alternative definitions

  • of (in most cases) profitability, that are

  • supposed to enrich the financial information

  • that investors receive about a company's performance.

  • In other words, free-of-charge additional information

  • to provide insights into the company.

  • That sounds like ordering steak at a restaurant

  • like you always do, and getting a free side order

  • of vegetables with it.

  • Many companies will include a footnote that states

  • that "non-GAAP metrics are useful to

  • investors in their assessment of

  • our operating performance

  • and the valuation of our company".

  • While the steak and vegetables analogy sounds good,

  • a better comparison would be to use

  • the classical optical illusion

  • of the old woman and the young woman.

  • What do you see?

  • A young woman, an old woman, or can you see both?

  • The young woman is on the left,

  • and her gaze seems to be away from us,

  • facing towards the top left.

  • The old woman is in the center,

  • with her gaze facing downward and to the left.

  • If that is too hard to see, try the duck and the rabbit:

  • is this a drawing of a duck with

  • its beak on the left, or a drawing

  • of a rabbit with its mouth on the right

  • and its ears on the left?

  • Having a company present you with both GAAP

  • and non-GAAP information, is very similar

  • to being asked to spot

  • both perspectives in these drawings!

  • It takes a bit of practice,

  • and some people are better at it than others.

  • How does one spot a non-GAAP metric?

  • Well, the words "adjusted" and "excluding"

  • often give it away: adjusted Gross Profit,

  • adjusted EBITDA, adjusted Net Earnings,

  • adjusted Earnings Per Share, Operating Profit excluding

  • special items, Net Income excluding

  • non-recurring items, and on and on and on.

  • By the way, some companies don't call

  • non-GAAP information "non-GAAP",

  • but speak of core profitability

  • normalized profitability,

  • underlying profitability, or "pro forma" measures.

  • Here's an example of a company that provides

  • a list of non-operational items that it excludes

  • to get to adjusted EBITDA and adjusted EPS:

  • Verizon Communications.

  • Its profitability according to GAAP was unusually low

  • in 2012 and 2014, and unusually high in

  • 2013 and 2015, mostly due to unusual charges

  • or credits in an operating expense line called

  • "Severance, Pension and Benefit".

  • It was a very significant charge (or extra cost)

  • in the range of 6 to 7 billion dollars

  • in 2012 and 2014, and a very significant credit

  • (or "negative cost") in 2013 and 2015.

  • If I want to do a long-term trend analysis as an investor,

  • it is useful to have the company

  • provide me with these numbers

  • to "normalize" the trend and exclude the noise.

  • Verizon is a very profitable company,

  • both under GAAP and non-GAAP metrics,

  • and adjustments from GAAP to non-GAAP

  • can go either way: results can become higher or lower

  • when unusual items are excluded.

  • Here's a second example:

  • pharmaceutical company Valeant.

  • In their overview of non-GAAP adjustments

  • to get from the GAAP net income at the top

  • to the non-GAAP net income at the bottom,

  • Valeant has a long list of up to 15 items,

  • and every year the non-GAAP results are higher

  • than the GAAP results.

  • In 2015, the company had a GAAP loss of $292 million

  • but an "adjusted" non-GAAP profit

  • of $2.8 billion after stripping out

  • amortization of intangible assets, acquisition costs and

  • other expenses.

  • On a revenue of $10.4 billion,

  • that means the GAAP net profit margin

  • of -3% has turned

  • into a non-GAAP profit margin of +27%.

  • Quite a difference!

  • So why should anyone worry about

  • the proliferation of non-GAAP measures?

  • There are four main reasons for that:

  • First of all, non-GAAP financial measures

  • are not audited!

  • The leadership of companies could be tempted

  • to behave in a more opportunistic way in classifying

  • results and defining metrics of success.

  • Second: more and more companies

  • are using non-GAAP financial measures,

  • which defeats the purpose

  • of the word "General" in the term

  • Generally Accepted Accounting Principles.

  • The Wall Street Journal recently reported

  • that only 6 percent of companies in the S&P500 index

  • reported 2015 financials using solely GAAP measures.

  • According to research firm Audit Analytics,

  • this figure was 25 percent in 2006.

  • Third: analysts and the media

  • have given non-GAAP metrics more prominence.

  • Fourth and perhaps most concerning,

  • non-GAAP results are very often better

  • than those reported under GAAP!

  • And the spread between them has been growing.

  • S&P published a study of FTSE100 companies

  • showing that around 80% of the companies reported

  • an adjusted operating profit that was higher

  • than the unadjusted operating profit.

  • So the big question is: how do we avoid

  • non-GAAP measures becoming

  • "Earnings Before Bad Stuff"?

  • Fortunately, the issue is in the spotlight

  • with regulatory agencies and

  • accounting standards boards,

  • all the way up to the chairmen!

  • They have made some very clear statements

  • about the concerns:

  • Securities and Exchange Commission

  • Chairman Mary Jo White has said:

  • "Non-GAAP information is meant to supplement

  • the GAAP information, but not supplant it."

  • and "In too many cases, the non-GAAP information

  • has become the key message to investors."

  • Hans Hoogervorst

  • (Chairman of the International Accounting Standards Board,

  • in charge of IFRS) said:

  • "Non-GAAP measures represent

  • a selective presentation

  • of an entity's financial performance.

  • Often, that selection is not free from bias." and

  • "We have found quite a few examples

  • of financial reporting where the IFRS numbers

  • are overshadowed

  • by non-GAAP measures.

  • In some cases,

  • it's really difficult to find the net income line."

  • Not only have representatives of regulatory agencies

  • and accounting standards boards voiced

  • their concerns, they are taking active steps

  • to reverse the trend of non-GAAP prominence.

  • Let's remember the overarching principle

  • of financial reporting: financial statements

  • should be a "fair and accurate representation"

  • of the company's financial position,

  • results of operations and cash flows.

  • For both GAAP and non-GAAP information,

  • another key principle is that

  • information cannot be misleading.

  • The active steps that are being taken

  • can be at the individual company level,

  • with the SEC sending more comment letters

  • to companies questioning their use

  • of non-GAAP metrics.

  • On the aggregate level, the SEC has issued

  • formal guidance on this topic.

  • Here are some striking examples of that guidance:

  • A non-GAAP measure that is adjusted only for

  • non-recurring charges when there were

  • non-recurring gains that occurred

  • during the same period

  • could violate Rule 100(b) of Regulation G

  • When a registrant presents a non-GAAP measure

  • it must present

  • the most directly comparable GAAP measure

  • with equal or greater prominence

  • - in this element of the guidance,

  • the SEC really spells it out:

  • do not present a non-GAAP measure

  • using a style of presentation

  • (such as bold or larger font) that emphasizes the

  • non-GAAP measure over the

  • comparable GAAP measure;

  • do not place a non-GAAP measure before

  • the most directly comparable GAAP measure;

  • do not include only a non-GAAP measure in

  • an earnings release headline.

  • Explain what is the purpose of the non-GAAP measure,

  • and why management believes investors

  • would find the non-GAAP measure useful.

  • Improvement is underway.

  • Among the S&P 500 companies reporting results

  • since the start of July 2016, 81% have given

  • prominence to GAAP figures, an increase from

  • the 52% that did so when reporting first-quarter

  • results, according to an Audit Analytics analysis

  • conducted for The Wall Street Journal.

  • I hope this was helpful.

  • Thank you for watching!

  • Please subscribe to

  • the Finance Storyteller YouTube channel.

  • More videos coming soon!

Welcome to the Finance Storyteller series!

字幕と単語

動画の操作 ここで「動画」の調整と「字幕」の表示を設定することができます

B1 中級

非GAAP基準とGAAP基準のメトリクスの比較 (Non-GAAP versus GAAP metrics)

  • 23 3
    陳虹如 に公開 2021 年 01 月 14 日
動画の中の単語