![]() Insurance companies will add back catastrophic losses if they think the losses aren't likely to recur. They'll add back restructuring charges and say they're a one-time thing. They'll add back depreciation because it is non-cash. Companies will make all sorts of changes to net income to look better. Of course, many non-GAAP (also called pro forma) reports of income aren't this easy. It's an easy back-of-the-envelope calculation. ![]() You don't have to adjust depreciation because capital expenditures are materially higher. When you use EBITDA, you don't have to worry about whether a company took on more debt that's reducing income with interest expense. This isn't a true GAAP number for income, but it makes it a little easier to compare income from year to year and company to company. EBIDTA is reported by most companies in press releases and financial statements. One of the most common forms of non-GAAP measurements in accounting is EBITDA, or earnings before interest, taxes, depreciation, and amortization. Be vigilant in your analysis and move on if a company is being too aggressive - even if the SEC hasn't done anything about it. That said, don't rely on the SEC to do due diligence on non-GAAP for you. In fact, the SEC has taken action in the past against companies that it believes are being too aggressive with non-GAAP numbers. However, non-GAAP financials are still governed by the SEC. While the FASB created and makes changes to GAAP, there's no direct creator of non-GAAP standards. You should be able to reconcile the company's GAAP and non-GAAP figures pretty easily. You probably don't have to worry that a company using non-GAAP accounting has a totally different set of books to produce its non-GAAP net income. While GAAP accounting covers the entirety of the accounting process from paying an invoice to creating financial statements, non-GAAP accounting is an adjustment to already existing numbers. When that happens, the company can also choose to report non-GAAP results. In some instances, GAAP reporting doesn't give investors a true picture of the current standing or long-term prospects of a company. ![]() While there will certainly be differences from industry to industry, you can expect the financial statements of similar companies to look and feel similar. These standards make it so you don't need to learn a totally new system of accounting and presentation for each individual company. GAAP is very useful for investors and auditors. ![]() What things need to be disclosed in the notes for financial statements.Īlthough we'll focus on public companies in this article, private companies that have audited financials also use GAAP.How information is presented to shareholders in an audited report.What types of expenses actually have to be capitalized as assets.How a company can recognize revenue and expenses.The purpose of GAAP standards is to create a uniform way of measuring a company's financial health. Securities and Exchange Commission (SEC). GAAP accounting standards are created and administered by the Financial Accounting Standards Board (FASB) and governed by the U.S. ![]()
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