Study: Percentage of Companies Using Non-GAAP Metrics Rose from 59 to 96 Percent in 20 Years

By:
Chris Gaetano
Published Date:
Oct 16, 2018
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A recent study has found that companies are increasingly using non-GAAP metrics in their reports, going from 59 percent of companies in 1996 to nearly all of them, 96 percent, in 2016, according to CFO.com.

The study, conducted by Audit Analytics, looked at 300 public companies in the S&P 500 between 1996 and 2016, and checked which ones used non-GAAP (generally accepting accounting principles) metrics in their 8-K or 10-K filings. The climb, incidentally, did not stop in 2016; the study also said that, in 2017, 97 percent of companies used at least one non-GAAP metric. 

Further, not only is the number of companies using non-GAAP metrics on the rise, so is the number of such metrics these companies used: in 1996, there was an average of 2.35 non-GAAP metrics in a given report; by 2016, this sum had increased to an average of 7.45. The most frequent types of non-GAAP metrics had to do with income, with 82 percent of all S&P 500 companies using at least one bespoke metric on this subject; following this was earnings per share, with 79 percent; cash flows, 35 percent; and EBITDA (earnings before interest, taxes, depreciation, and amortization) or adjusted EBITDA, at 24 percent. 

While boosters have said the use of non-GAAP metrics allow companies to offer information that investors genuinely want, the SEC has, in the past, voiced suspicion that certain companies are using them to instead confuse investors and distract from negative news. For example, the SEC critiqued Tesla in 2016 for adding back certain costs to the GAAP revenue calculation to come up with a custom figure. The SEC said that the company lacked substantive reasons for presenting this tailored figure to investors, and dismissed Tesla's reasoning that management uses the figures internally, noting that the justification needs to involve why using it is better for investors in particular. 

Other academic studies have raised similar points as the SEC. A 2016 study found that, in the pharmaceutical industry, the difference between GAAP earnings and non-GAAP "adjusted earnings" increased from 22 percent in the first quarter of 2014 to 28 percent, in the first quarter 2016. Non-GAAP net income for the industry, too, is much higher than what GAAP alone reports: 40 percent over the last 13 quarters. Another study from last year found that when companies make large positive adjustments to non-GAAP earnings, their CEOs make 23 percent more than their expected annual compensation would be if GAAP numbers were used. This is despite such firms having weak contemporaneous and future operating performance relative to other firms. Even when specifically ordered not to use non-GAAP metrics, at least one company, Blizzard, instructed business media to ignore the GAAP figures in their report and continue using the non-GAAP metrics that had been barred from official use. 

This most recent study echoed what the SEC and other research has observed. It found that among 342 companies that reported some kind of adjusted net income metric in 2017, in more than two-thirds of the cases, 69 percent, the non-GAAP figure exceeded GAAP net income. The average per-company disparity between the two figures was more than $1.3 billion. This number was even higher in other years:  it was 84 percent in 2016. The drop was largely attributed to excluding one-time tax charges from the Tax Cuts and Jobs Act. 

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