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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 US 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 met 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 the IASB is doing to address them.
Acknowledging this is an issue, in December 2016 the IASB added to its work plan a major research project innocuously titled ‘Primary Financial Statements’. While the project is multi-faceted, the IASB has tentatively decided to focus on improvements to the income and cash flow statements with much of its attention on the income statement (‘the P&L’). This is where the IASB will start addressing non-GAAP earnings measures, often referred to as ‘alternative performance measures’ (APMs), such as income before non-recurring items. The IASB is starting with a mindset that APMs are valuable when properly used and are here to stay. The question then becomes to what extent, if any, should the IASB require or permit the traditional income statement to include APMs on its face.