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December 4, 2022

New SEC Rules Have Made GAAP Great Again (in Press Releases Anyway)

For some time now, I've been featuring various worries by various people about non-GAAP reporting in the morning roundup. You see, lots of people think that GAAP = Good and non-GAAP = Bad because non-GAAP reporting often presents a rosier picture of a company's financial performance.

This made non-GAAP reporting immensely popular among public companies in recent years and resulted in these custom metrics being given more prominence in earnings communications. This diversion away from GAAP worried observers and experts that users wouldn't be able to discern which numbers were best to consider when making investment decisions. All this worrying occurred despite the fact that companies are required by Regulation G to reconcile their non-GAAP metrics back to GAAP in all their communication.

All this worrying has been pretty silly also because lots of investors like the non-GAAP metrics for doing their analysis and making decisions so, really, what difference does it make where the GAAP and non-GAAP numbers appear in a press release? I do not know and I have yet to receive a satisfactory answer.

Eventually all this worrying reached the ears of the Securities and Exchange Commission and earlier this year, they decided to update their rules on reporting non-GAAP metrics. Companies have been reporting second quarter results this month and it appears many of them got the message:

More than a quarter of the companies in the S&P 500 index have shifted results that conform with Generally Accepted Accounting Principles to the top of news releases outlining their most recent financial performance.

Among the S&P 500 companies reporting results since the start of July, 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. 

And, ICYMI, this means no funny business with wordsmithing or formatting:

If a paragraph or table contains standard and adjusted figures, companies must make sure sentences or columns with the standard, or GAAP, information precedes everything else.

Numbers must be also be presented in the same style, meaning customized metrics can’t be bolded or printed in a larger-size font, nor can they be described as “record” or “exceptional” unless GAAP results are characterized in a similar way.

“There’s little appetite at the SEC for companies who don’t assess the guidance and self-correct,” said Paula Hamric, a partner in accounting firm BDO USA’s national SEC practice.

Part of me hopes that some companies use this an excuse to flood their press releases with superlatives. Let's use HP's recent results as an example:

HP reports SUPERB third quarter fiscal 2016 results.

SUPERB Q3 gaap earnings per share $0.49 from continuing operations

SUPERB Q3 non-gaap earnings per share $0.48 from continuing operations

SUPERB Q3 revenue $11.9 billion versus i/b/e/s view $11.46 billion

Sees SUPERB fy 2016 gaap earnings per share $1.46 to $1.49 from continuing operations

Sees SUPERB q4 2016 gaap earnings per share $0.22 to $0.25 from continuing operations

Sees SUPERB fy 2016 non-gaap earnings per share $1.59 to $1.62 from continuing operations

Sees SUPERB q4 2016 non-gaap earnings per share $0.34 to $0.37 from continuing operations

And so on. Yes, all corporate earnings announcements would read like a press release from the Trump campaign, but given the monotony of these statements, I’m certain this is the course of action all companies should take.


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