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The drivers, consequences and policy implications of non-GAAP earnings reporting

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  • Steven Young
Abstract
Non-generally accepted accounting principles (GAAP) (pro forma) earnings form an increasingly important part of firms' performance reporting narrative. This paper reviews the academic and professional debate surrounding non-GAAP earnings reporting by management. I argue that the demand for customised performance reporting is a natural response to constraints imposed by a one-size-fits-all reporting system and that the non-GAAP phenomenon forms part of a long-standing debate over the definition and presentation of periodic performance. A review of extant research suggests non-GAAP disclosures are driven by informative reporting and opportunistic motives. Opaque presentation of non-GAAP earnings is associated with earnings mispricing, particularly among unsophisticated investor groups. Regulations and governance systems designed to ensure transparency are associated with higher quality disclosures and less mispricing. While customised reporting behaviour is evident in many settings, I argue that such disclosures create particular risks in a financial reporting context because they threaten the integrity of the underlying reporting system. Prevailing regulatory approaches are reviewed and factors limiting disclosure transparency are highlighted. The paper concludes with suggestions for further research.

Suggested Citation

  • Steven Young, 2014. "The drivers, consequences and policy implications of non-GAAP earnings reporting," Accounting and Business Research, Taylor & Francis Journals, vol. 44(4), pages 444-465, August.
    • Handle: RePEc:taf:acctbr:v:44:y:2014:i:4:p:444-465
    DOI: 10.1080/00014788.2014.900952
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    13. Edward J. Riedl & Suraj Srinivasan, 2010. "Signaling Firm Performance Through Financial Statement Presentation: An Analysis Using Special Items," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 8-8, March.
    14. Martin Walker & Evagelia Louvari, 2003. "The determinants of voluntary disclosure of adjusted earnings per share measures by UK quoted companies," Accounting and Business Research, Taylor & Francis Journals, vol. 33(4), pages 295-309.
    15. Tom Copeland & Aaron Dolgoff, 2006. "Expectations‐Based Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(2), pages 82-97, March.
    16. Wayne R. Landsman & Bruce L. Miller & Shu Yeh, 2007. "Implications of Components of Income Excluded from Pro Forma Earnings for Future Profitability and Equity Valuation," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(3‐4), pages 650-675, April.
    17. Patric Andersson & Niclas Hellman, 2007. "Does Pro Forma Reporting Bias Analyst Forecasts?," European Accounting Review, Taylor & Francis Journals, vol. 16(2), pages 277-298.
    18. Athanasakou, Vasiliki E. & Strong, Norman C. & Walker, Martin, 2007. "Classificatory income smoothing: The impact of a change in regime of reporting financial performance," Journal of Accounting and Public Policy, Elsevier, vol. 26(4), pages 387-435.
    19. Zhang, Huai & Zheng, Liu, 2011. "The valuation impact of reconciling pro forma earnings to GAAP earnings," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 186-202, February.
    20. Stephen Lin & Martin Walker, 2000. "FRS3 earnings, Headline earnings, and accounting-based valuation models," Accounting and Business Research, Taylor & Francis Journals, vol. 30(4), pages 299-306.
    21. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 41-66, March.
    22. Dirk E. Black & Theodore E. Christensen, 2009. "US Managers' Use of ‘Pro Forma’ Adjustments to Meet Strategic Earnings Targets," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 297-326, April.
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    Cited by:

    1. Wolfgang Ballwieser, 2019. "Überlegungen zu Theorie und Praxis der Finanzberichterstattung: Herausforderungen, Erkenntnisse und Lücken [Reflections on Theory and Practice of Financial Reporting: Challenges, Scientific Finding," Schmalenbach Journal of Business Research, Springer, vol. 71(2), pages 169-211, July.
    2. Visani, Franco & Di Lascio, F. Marta L. & Gardini, Silvia, 2020. "The impact of institutional and cultural factors on the use of non-GAAP financial measures. International evidence from the oil and gas industry," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    3. Black, D.E. & Christensen, T.E., 2018. "Policy implications of research on non-GAAP reporting," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 1-7.
    4. Felix Thielemann & Tami Dinh & Helen Kang, 2019. "Non-GAAP Reporting and Debt Market Outcomes: Evidence from Regulation G," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 71(2), pages 169-203, May.
    5. Silvia Gardini & F. Marta L. Di Lascio & Franco Visani, 2017. "Opportunism in disclosing pro-forma indicators: rationale and contextual drivers," BEMPS - Bozen Economics & Management Paper Series BEMPS42, Faculty of Economics and Management at the Free University of Bozen.
    6. Alessandro Gaetano, 2020. "Book Review," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2020(1), pages 161-164.
    7. Ralf P. Thomas & Jochen Schmitz & Jürgen M. Wagner, 2016. "Adressatengerechte Kapitalmarktkommunikation als unternehmensindividuelle Managementverantwortung [User-Oriented Capital Market Communication – a Company-Specific Management Responsibility]," Schmalenbach Journal of Business Research, Springer, vol. 68(4), pages 447-473, December.
    8. Mark A. Clatworthy & Tuan Ho & Jude Mengzhu Zhu, 2022. "Disagreement about the past: An empirical assessment of bank analysts' GAAP and non‐GAAP earnings measures," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 588-624, March.
    9. Charitou, Andreas & Floropoulos, Nikolaos & Karamanou, Irene & Loizides, George, 2018. "Non-GAAP Earnings Disclosures on the Face of the Income Statement by UK Firms: The Effect on Market Liquidity," The International Journal of Accounting, Elsevier, vol. 53(3), pages 183-202.
    10. Edith Leung & David Veenman, 2018. "Non‐GAAP Earnings Disclosure in Loss Firms," Journal of Accounting Research, Wiley Blackwell, vol. 56(4), pages 1083-1137, September.
    11. Grégoire Davrinche & Guillaume Dumas & Isabelle Martinez, 2017. "Résultats non-GAAP et opportunisme des dirigeants," Post-Print hal-03948521, HAL.
    12. Elizabeth A. Rainsbury, 2017. "The Impact of the FMA Guidelines on Non†GAAP Earnings Disclosures," Australian Accounting Review, CPA Australia, vol. 27(4), pages 480-493, December.
    13. Sascha B. Herr & Peter Lorson & Jochen Pilhofer, 2022. "Alternative Performance Measures: A Structured Literature Review of Research in Academic and Professional Journals," Schmalenbach Journal of Business Research, Springer, vol. 74(3), pages 389-451, September.
    14. Thielemann, Felix & Dinh, Tami, 2019. "Non-GAAP earnings disclosures around regulation G – The case of “implicit non-GAAP reporting”," Advances in accounting, Elsevier, vol. 46(C), pages 1-1.

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