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The Daily

Less Than 6 Percent of Fortune 500 Companies Use Standard GAAP

Chris Gaetano
Published Date:
Jun 30, 2016
'MIND THE GAP 5023794412' by Licensed under CC BY 2.0 via Wikimedia CommonsOnly 5.7 percent of Fortune 500 companies use no non-GAAP measures, a significant decrease from ten years ago, when it was 25 percent, according to The Wall Street Journal. The rest supplement their GAAP reporting with non-GAAP metrics, such as by reporting an adjusted earnings figure that strips out non-cash and non-recurring items. This has had the effect, though, of creating two increasingly divergent sets of earnings, one calculated by GAAP alone, and the other using modified non-GAAP metrics. How divergent? The Wall Street Journal said that these adjusted earnings are inflated by an average of 44 percent at profitable companies, which in turn translated into a $94 billion chasm between what GAAP says and what companies' non-GAAP metrics say, at least in the case of profitable companies in the most recent fiscal year. For those 328 that reported a net loss, using non-GAAP metrics provided a $65 billion cushion against even worse GAAP results. 

The Securities and Exchange Commission does allow the use of non-GAAP financial metrics so long as they are not misleading. Lately, though, voices within the commission have expressed worry that companies may be abusing them. SEC Chief Accountant James Schnurr, in a speech in March, singled out non-GAAP metrics, saying that they are meant to supplement, not supplant, standard financial information. 

"However, when the financial news networks report quarterly earnings, they very frequently report the non-GAAP measure of earnings with no reference to the actual GAAP earnings, often not even identifying it as having been adjusted," said Schnurr in his speech. 

He said that the growth of non-GAAP reporting metrics, and the reliance upon them by analysts, should warrant increased focus by management and the audit committee. 

SEC Chair Mary Jo White, around the same time, said in a speech that the commission is examining the issue closely, and is weighing whether or not to regulate the use of non-GAAP reporting metrics, according to a Wall Street Journal article from March.