GAAP or non-GAAP?

• Author: Smetanka, Rick
• Position: FINANCIAL REPORTING - Generally accepted accounting principles

As best-of-breed companies continue to search for more meaningful and effective ways to communicate with in-vestors, analysts and business partners, the use of non-GAAP accepted accounting principles] financial meas-ures is making a comeback. Each quarter, many established and emerging public companies - such as the Walt Disney Co. and Zynga, respectively - use non-GAAP financial measures to provide insight into key operational metrics and to supplement increasingly complex GAAP results.

Further, a recent study of venture-backed initial public offerings by law firm Wilson Sonsini Goodrich & Rosati de-termined that half of the companies surveyed disclosed non-GAAP financial measures.

As business models evolve and grow in complexity, and as those in financial reporting roles struggle to satisfy the growing appetite of a hungry investing public, non-GAAP measures are being used increasingly by smart companies as a strategic asset to communicate effectively and clearly their financial performance from the prevue of management.

What Exactly is a Non-GAAP Measure?

The U.S. Securities and Exchange Commission (SEC) considers a non-GAAP financial measure a numerical measure of past or future financial performance, financial position or cash flows that includes amounts that are excluded from the most directly comparable GAAP measure or excludes amounts that are included in the most directly comparable GAAP measure.

Common examples of non-GAAP measures are EBITDAbefore interest, taxes, depreciation and amortization), EBIT (earnings before interest and taxes) and FFO (funds from operations). Further, companies that disclose operating income that excludes "nonrecurring" items such as restructuring expenses or impairment charges are using non-GAAP financial measures.

Non-GAAP financial measures do not include operating or other statistics that are not financial in nature or measures that are based on GAAP information. For example, the following do not meet the definition of a non-GAAP financial measure: number of employees, subscribers or stores; return on sales or gross margins computed using GAAP amounts; estimated revenues/expenses of a new product line provided that the estimates are based on GAAP compu tations. Companies are prohibited from presenting non-GAAP financial measures on the face of the GAAP financial statements or in the notes.

Past Abuses and Sarbanes-Oxley

The dot-com boom of the late 1990s and early 2000s saw many emerging companies...