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Non-GAAP vs. GAAP Financial Reporting: A Look at the Differences

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    Key Takeaways:

    • All public companies in the United States must provide quarterly financial statements
    • GAAP is the standard accounting method for these releases
    • Some organizations will also release non-GAAP information
    • Learning the difference can help investors make informed decisions

    Businesses of all sizes have accounting systems to keep their finances in order. Knowing how the company is financially performing helps those in charge make decisions to grow the organization or ensure it stays afloat when things get challenging. It also gives a picture of the business’s overall health

    Investors need to pay attention to company finances, too, and all public companies in the United States are required to provide financial statements. These statements are filed using generally accepted accounting principles, or GAAP. About 95% of S&P 500 companies also release non-GAAP financials, providing investors with additional information.

    Learning the differences between non-GAAP vs. GAAP accounting rules can assist investors as they make decisions with their money. Continue reading to learn more about GAAP earnings and how they differ from non-GAAP reporting.

    Defining GAAP and Non-GAAP

    Learning GAAP accounting standards involves reading up on its principles. These standards are in place to define a uniform way to measure an individual organization’s financial health. 

    GAAP principles dictate how the company can recognize its expenses and revenue, which expenses it must include as assets, and how the organization must present this information to investors. These principles also mention which items the business must disclose in the financial statement’s notes.

    GAAP doesn’t give investors an accurate idea of the organization’s long-term prospects. That’s where non-GAAP accounting comes in, as it provides additional information.

    Non-GAAP uses the same numbers as GAAP accounting but arranges them differently and includes everything involved in the accounting process. A non-GAAP company isn’t using a different set of books when producing these numbers – it consists of the entire the accounting process to adjust its net income. Companies can do all sorts of alterations to make the net income look better, so investors must be diligent when reading these numbers.

    The Rules and Standards of GAAP

    GAAP came to the forefront in the 1970s to ensure transparent and consistent financial reporting by public companies. The principles were built on four major rules and standards that remain to this day. These rules define:

    1. Accrual Accounting Methods

    Accrual accounting records revenue from a good or service when the item sells but not when payment is received. This type of accounting means the system records direct expenses for sold goods at the time of sale and indirect costs when business expenses are paid.

    2. Capital Expenditures and Depreciation

    GAAP calls for the costs of significant asset acquisitions to spread over the asset’s life. This rule means the price of a 20-year asset will be accounted for at 5% of its value for 20 years.

    3. Historical Cost Reporting

    Assets like properties, facilities, and equipment are accounted for using their original purchase costs. Companies cannot use the current value of an appreciating asset to increase the expenses on their financial statements.

    4. Reporting Bad Debts

    Organizations with significant money owed to them by customers must mention that they might not receive some or all of the money in the future. This money could become lost revenue because there’s a good chance they’ll never receive it from the debtor.

    These standards make it easier for investors to research company financials by creating a reporting style that provides uniform information. Investors won’t have to learn new formats when exploring new opportunities, streamlining the entire process.

    6 Differences Between GAAP and Non-GAAP

    There are a number of differences between GAAP and non-GAAP financials because they’re entirely distinct accounting methods. Investors will want to learn about these differences before reading income statements. Some specific items to keep in mind include:

    1. GAAP Follows a Set of Standards

    GAAP is a set of accounting standards created by the Financial Accounting Standards Board and implemented by the U.S. Securities and Exchange Commission. It follows a set of criteria in accounting that ensures the numbers provide an accurate account of the organization’s financial picture. Non-GAAP accounting doesn’t have a direct creator, although it’s still regulated by the SEC and often uses earnings before interest, taxes, depreciation, and amortization principles.

    2. All Public Companies Follow GAAP

    There are laws in place stating all public companies must follow GAAP principles when releasing financial statements. Private companies don’t have to follow GAAP, but many do. There’s no obligation to release non-GAAP reports by any business.

    3. GAAP Includes Non-Recurring Expenses

    A significant difference is that GAAP includes non-recurring expenses in its financial statements. Non-GAAP statements aren’t required to include these expenses, which companies believe show a clearer picture of their business operations.

    4. Non-GAAP Allows Window Dressing

    Window dressing refers to the manipulation of financial statements to show the company in a more favorable light. Non-GAAP allows for this practice, but GAAP accounting only presents the numbers, with no room for interpretation.

    5. GAAP Is More Challenging to Understand

    A significant drawback for novice investors is that GAAP statements can be challenging to understand in their standard format. Figuring out what the numbers mean involves a learning curve that isn’t present in non-GAAP reports.

    6. Non-GAAP Isn’t Useful When Comparing Companies

    GAAP financials allow investors to compare companies and industries yearly because the data is incredibly reliable and standardized. There’s no standard for non-GAAP documents, though, so investors can use it to understand an individual company but not to compare it against others.

    The differences between these presentation methods are worth examining before getting involved in the investment world. Obtaining as much information as possible on public companies makes investment decisions far more straightforward.

    Contact an Experts for More Information

    Non-GAAP vs. GAAP is only part of the equation when researching a company’s financial health for investment purposes. Investors should carefully plan their strategies while considering the financials of potential targets.

    Bogart Wealth offers investment management services in Northern Virginia and the Greater Houston area. We’ll take the time to learn about your investment goals and develop a custom plan that matches what you want to achieve. Contact Bogart Wealth to speak with an expert about your financial objectives.

    Work with a financial advisor who puts your needs first.

    Want to talk first? Call us at
    (866) 237-0121

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