GAAP vs non-GAAP
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- เผยแพร่เมื่อ 21 ก.ค. 2024
- What are non-GAAP metrics? What are definitions, examples and concerns regarding non-GAAP financial measures? Learn the difference between GAAP and non-GAAP in this video!
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00:00 Introduction
01:02 What is GAAP? What is non-GAAP?
03:13 What are "common" non-GAAP metrics?
05:43 What are the concerns about non-GAAP reporting?
08:09 Which guidance on GAAP/non-GAAP have regulators (SEC, FASB, IASB) provided?
We walk through the context of GAAP and non-GAAP metrics in this video, and discuss Verizon (NYSE: VZ) non-GAAP measurements and Valeant (NYSE: VRX) non-GAAP metrics.
GAAP means Generally Accepted Accounting Principles. 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. 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”.
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.
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.
For a review of the similarities and differences between US GAAP and IFRS, please watch this related video:
• US GAAP vs IFRS
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More information on the SEC guidance on non-GAAP measures available at:
www.sec.gov/divisions/corpfin...
Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: TH-cam videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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Enjoyed this explanation of GAAP versus non-GAAP? Then please subscribe to my channel, and watch my US GAAP vs IFRS video next: th-cam.com/video/7B96MhOGaqE/w-d-xo.html
Very clear explanation. Thank you. Cheers from Brazil!
Glad it was helpful, Douglas! Greetings back from the Netherlands. 🙂
Very good explaination and with good examples. Thanks :-)
You're welcome! Yes, always keep real world reality firmly in sight! ;-)
sorry iam lost at the end
so should i relay on gaap or non-gaap ?
Rely mostly on GAAP: Generally Accepted Accounting Principles.
Hi. Your explaination is so clear. But I wonder how can we collect non-GAAP information? While we can find GAAP measures in financial statement. Thanks
Thank you for the compliment! Non-GAAP information is often presented in investor meeting presentations, and quarterly earnings conference calls, so you would find the info in those slidedecks, hopefully with a footnote that has a definition of the term. 10-Q and 10-K SEC filings, as well as annual reports, can also contain non-GAAP information (which should be indicated as such by the company filing the report). The specific section is most often called Management Discussion & Analysis (MD&A).
Thanks for your answer. I wonder whether there is a database containing non-GAAP numbers? If not, maybe we have to hand-collect them.
That is a very good question. I would guess that academics and/or research analysts (for investment firms and banks) may have put such a database together, but it might not be "open to the public". Furthermore, non-GAAP information is inherently not standardized, see my video on Free Cash Flow where even though the term is named the same the definitions differ by company th-cam.com/video/gl3OLtEX2PM/w-d-xo.html
But to evaluate the earning power of a company so that you can evaluate the proper price for the company you must remove the non-recurring items from net income.
Non-GAAP and/or non-recurring items tend to be very subjective, so it's hard to get to the "real number" to take into account for valuation purposes.
Great stuff. Thank you n
You're welcome! Thank you for watching and commenting!
Very interesting case then with Align Technology (ALGN) right now. Their non-GAAP valuation is A LOT worse than their GAAP valuation. How does this happen?
I see they had an uncharacteristically high amount of Deferred Tax Assets in 2020 than in 2019, could that be it?
Apparently, this is related to the intra-entity transfer of certain intellectual property rights and assets to their Swiss subsidiary, which creates a one-time net tax benefit. I have seen that happen in other companies as well, but don't know the details behind it....
@@TheFinanceStoryteller so basically the non-GAAP vaulation right now is more accurate?
@@Jannik77220 Non-GAAP income numbers take out unusual items and non-recurring items, so they have some value in showing underlying trends year-over-year. Both GAAP income numbers and non-GAAP income numbers tell a part of the overall story. I wouldn't say that one is more accurate than the other. Just be very careful that the list of adjustments to get from GAAP to non-GAAP income numbers is not too long, as we don't want non-GAAP income to become "earnings before bad news". ;-)
This is why I only take the data from the SEC filings.
If analyst are increasingly placing more prominence on Non-GAAP measures, this is all the more reason why I don't trust their findings.
I have seen some investor presentations by companies where it looked like they kept adjusting non-GAAP net income until the outcome was a positive number.... Those are not necessarily companies I would invest in. The more non-GAAP adjustment line items, and the larger their item size, the more suspicious I get.
Thanks bro
Graag gedaan, makker!
Wow shocking !!
Agree! However, if you are warned, it hopefully won't hurt you much! Take a look at my video on IPOs as well, it explains some of the related dynamics: th-cam.com/video/4t62BEH9Ajs/w-d-xo.html
I've been staring at that illusion for 2 minutes already and I still don't see the old woman. lol
EDIT: Found her!
Well done!!!! 😉 Hope that makes spotting GAAP vs non-GAAP reporting easier as well.
nah. That's clearly a younger woman looking away, and that's a duck.