For those who have never read a 10K in their life, the SEC requires all companies who publish non-GAAP metrics to also (1) publish GAAP metrics more prominently than non-GAAP metrics and (2) publish a reconciliation on how they arrived at their non-GAAP measure from the published GAAP metrics.
There’s a difference between what Enron did (ie. fraud) vs presenting alternative ways to measure business performance. If an investor thinks community adjusted EBITDA is a good metric to judge a business and then loses all their money, that’s on the investor. Even our most recent poster child of non-GAAP shenanigans publishes the GAAP numbers ahead of the non-GAAP measures (see eg. Page 111 which is the first mention of “adjusted EBITDA” presented below GAAP metrics vs page 21 on which the GAAP income statement is first published): https://www.sec.gov/Archives/edgar/data/1533523/000119312519...
Worth pointing out that this is largely a US only problem. Rest of the world uses IFRS which clamped down on that non-GAAP adjustment stuff pretty hard because well it’s not exactly a subtle gambit
I think non-GAAP adjustments were mostly used in the article as a rough marker of "crookedness" that you can measure. Because by far, worldwide, the primary means of fraud involves revenue recognition and other accounting shenanigans (very much recommend the book by the same name) that both IFRS and GAAP are vulnerable to. It's just that's much harder to find that stuff out. But, when the SEC notices a problem with your revenue recognition policies affecting your revenue by a few percent, the SEC comes down on you hard. KHC was an example of that last year or maybe 2 years ago with the new rules in ASC606.
It was news to me that IFRS cracked down on non-GAAP adjustments, particularly because I follow some foreign filers in the US and haven't noticed much of a difference. But then again, I don't follow a lot of companies with the type of management that harps on EBITDA and adjusted EBITDA anyway. According to Charlie Munger, "I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase, “bullshit earnings.”
US governments at all levels love to use GAAP since it lets them use whatever assumptions they want to make up liability numbers for defined benefit pension and retiree healthcare benefits. In fact, the US itself forced non taxpayer funded employers to use strict standards when calculating defined benefit pension liabilities (PPA 2006), but exempted taxpayer funded pension plans from any rules.
This lets current politicians and current and near future recipients of defined benefit pensions to transfer the costs to future future taxpayers.
Buffett makes non-GAAP adjustments available because GAAP misses important nuances. Also, in the US, security appreciation and depreciation is now reported as earnings (or something ridiculous like that), so it’s pretty important to be able to explain real earnings to your shareholders.
Is there an official list of assumptions used in GAAP? According to the wikipedia, GAAP is just a bunch of very high level principles, such as be honest, consistent, give your best estimate of your finances... But it doesn't seem to prescribe any particular rules to use, just that you use them consistently. And then, what does that mean about non-GAAP ? Does non-GAAP basically allow you to be inconsistent and dishonest or use less than your best guess ?
Thanks. It is easy to forget how much reporting is specifically about the US, and that a lot of the rest of the world doesn't really have the same problems.
What a horrible article most investors understand Chinese companies lie about their number all the time. The non Chinese example is WeWork which was completely rejected by the market and failed to go public?
And Enron, Olympus, bt, WorldCom, Tesco, those people who bought dragon dictate and the African firm whose balance sheet was entirely supported by a large green gemstone. Just to name a few off the top of my head. Trying to work out a firm's true assets, liabilities and income is a genuine problem.
nknealk|5 years ago
Here’s a writeup of the SEC rules on non-GAAP metrics in earnings reports: https://www.protiviti.com/US-en/insights/sec-issues-guidance...
There’s a difference between what Enron did (ie. fraud) vs presenting alternative ways to measure business performance. If an investor thinks community adjusted EBITDA is a good metric to judge a business and then loses all their money, that’s on the investor. Even our most recent poster child of non-GAAP shenanigans publishes the GAAP numbers ahead of the non-GAAP measures (see eg. Page 111 which is the first mention of “adjusted EBITDA” presented below GAAP metrics vs page 21 on which the GAAP income statement is first published): https://www.sec.gov/Archives/edgar/data/1533523/000119312519...
Havoc|5 years ago
CapriciousCptl|5 years ago
It was news to me that IFRS cracked down on non-GAAP adjustments, particularly because I follow some foreign filers in the US and haven't noticed much of a difference. But then again, I don't follow a lot of companies with the type of management that harps on EBITDA and adjusted EBITDA anyway. According to Charlie Munger, "I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase, “bullshit earnings.”
lotsofpulp|5 years ago
This lets current politicians and current and near future recipients of defined benefit pensions to transfer the costs to future future taxpayers.
christophilus|5 years ago
naveen99|5 years ago
Edit: I found a little more detail under revenue recognition page on wikipedia : https://en.wikipedia.org/wiki/Revenue_recognition
jmaa|5 years ago
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