Non-GAAP Measures in Financial Planning

By Sean Stein Smith, CPA, Rutgers School of Business – January 11, 2017
Non-GAAP Measures in Financial Planning

Financial information can be confusing for both professionals who work with it every day and for people attempting to analyze information for their personal financial plans. The sheer volume of data alone can complicate the decision-making process from an organizational and financial planning perspective.

Complicating this further is the reporting of non-GAAP information by companies, which is increasingly common for many U.S. based organizations. According to a FASB report1, the 25 largest non-financial U.S. based companies are now reporting non-GAAP information to shareholders. But what exactly is non-GAAP information, and why does it matter to accountants and individuals building their personal financial plan?

While non-GAAP earnings obviously cannot be included in the financial statements filed by publicly traded organizations, the inclusion of such information can be present in the Management Discussion & Analysis (MD&A) section of the information that is filed with the SEC. Non-GAAP financial results, metrics and other information can be presented in different ways. One organization might not include stock-based compensation that is incentive in nature. Another might emphasize revenue growth, cash flow or other non-income-based metrics. Another tactic is the classification of certain information as “one-off” or “one-time” items. At first glance, this might not seem like an issue worthy of further discussion. Companies, after all, often highlight specific data points that make their organizations look best. The spread and increasing use of non-GAAP information, however, represents a significant shift in how information is communicated to shareholders, CPA practitioners and investors.

Pitfalls of Non-GAAP Data

Although non-GAAP simply is the presentation of certain data points over other pieces of information, it can present several pitfalls for individuals seeking to allocate capital, invest in equities or simply start planning for retirement. The true downside is that this information, which is not regulated by the CPA profession, is included and presented in the same breath as GAAP metrics such as revenue, income and earnings per share. A specific principle in the Common Sense governance principles2, supported by larger institutions and institutional investors, addresses this matter by reinforcing the secondary nature of non-GAAP information for communication purposes. Such a combination of information does appear to be a coincidence. Management teams are continuously looking to outperform investor expectations, and non-GAAP information may provide the leverage necessary to fulfill these obligations. For financial planning professionals seeking to advise investors and clients, this presents both a challenge and an opportunity.

Adding Value and Interpreting Information

Establishing a financial plan appropriate for clients requires that both the financial professional and the individual client understand the information that is presented to them. Non-GAAP metrics muddy the waters and can make this process more difficult, depending on where the financial plan is focused. Fortunately, there are two important ways that CPAs and Certified Financial Planners (CFPs) can deliver value to the financial planning process. First, explaining what exactly is being described or communicated is clearly a role applicable to the financial planning process. Especially pertinent in light of the spread of non-GAAP communication, this role and value-added process has taken on increasing importance. Second, and building on the first point, pertains to linking non-GAAP and GAAP information, i.e., establishing a relationship between the non-GAAP information reported by the organization and GAAP information more familiar to financial professionals and investors.

Simply put, managing the financial planning process is a multi-faceted and rapidly changing area for accounting professionals. While you can use non-GAAP data to help explain results, it should not overshadow the GAAP results reported to both the SEC and shareholders. Management teams desire to present their organizations in the most favorable light possible, and it remains with CPAs and CFPs to ensure that the information provided to clients is accurate.

1. For the Investor: The Use of Non-GAAP Metrics
2. CommonSense Corporate Goverance Principles

This article appeared in the Jarnuary/February 2017 issue of New Jersey CPA magazine. Read the full issue.