Will the proliferation of non-GAAP earnings measures ever end? The short and long answers are “no—neither now nor ever.” Almost every public company uses them in some manner, as do most analysts. Properly used, non-GAAP measures are extremely valuable. For example, they can enhance financial analysis by isolating the effects of items that do not promote an understanding of historical or future trends of earnings or cash flows. At the other extreme, unfortunately sometimes non-GAAP performance reporting is used to ignore inconvenient charges or to perfume the pig, thereby giving non-GAAP reporting a bad name.
Above the pretax income line neither IFRS Standards nor U.S. GAAP provide much in the way of guidance for defining, requiring or even permitting the reporting of operating results labelled such as: recurring income; earnings from core business operations; EBIT (earnings before interest and tax); operating profit; etc. I could list more, but you see the point. So, if non-GAAP measures can and do serve legitimate purposes which are not being meet by current reporting standards, what can—or should—accounting standard setters do about it? This article explores some of the issues and challenges and describes what we at the International Accounting Standards Board (IASB) are doing to address them.
