June 23, 2018

New SEC Rules Have Made GAAP Great Again (in Press Releases Anyway)

For some time now, I've been featuring various worries by various people about non-GAAP reporting in the morning roundup. You see, lots of people think that GAAP = Good and non-GAAP = Bad because non-GAAP reporting often presents a rosier picture of a company's financial performance.

This made non-GAAP reporting immensely popular among public companies in recent years and resulted in these custom metrics being given more prominence in earnings communications. This diversion away from GAAP worried observers and experts that users wouldn't be able to discern which numbers were best to consider when making investment decisions. All this worrying occurred despite the fact that companies are required by Regulation G to reconcile their non-GAAP metrics back to GAAP in all their communication.

All this worrying has been pretty silly also because lots of investors like the non-GAAP metrics for doing their analysis and making decisions so, really, what difference does it make where the GAAP and non-GAAP numbers appear in a press release? I do not know and I have yet to receive a satisfactory answer.

Eventually all this worrying reached the ears of the Securities and Exchange Commission and earlier this year, they decided to update their rules on reporting non-GAAP metrics. Companies have been reporting second quarter results this month and it appears many of them got the message:

More than a quarter of the companies in the S&P 500 index have shifted results that conform with Generally Accepted Accounting Principles to the top of news releases outlining their most recent financial performance.

Among the S&P 500 companies reporting results since the start of July, 81% have given prominence to GAAP figures, an increase from the 52% that did so when reporting first-quarter results, according to an Audit Analytics analysis conducted for The Wall Street Journal. 

And, ICYMI, this means no funny business with wordsmithing or formatting:

If a paragraph or table contains standard and adjusted figures, companies must make sure sentences or columns with the standard, or GAAP, information precedes everything else.

Numbers must be also be presented in the same style, meaning customized metrics can’t be bolded or printed in a larger-size font, nor can they be described as “record” or “exceptional” unless GAAP results are characterized in a similar way.

“There’s little appetite at the SEC for companies who don’t assess the guidance and self-correct,” said Paula Hamric, a partner in accounting firm BDO USA’s national SEC practice.

Part of me hopes that some companies use this an excuse to flood their press releases with superlatives. Let's use HP's recent results as an example:

HP reports SUPERB third quarter fiscal 2016 results.

SUPERB Q3 gaap earnings per share $0.49 from continuing operations

SUPERB Q3 non-gaap earnings per share $0.48 from continuing operations

SUPERB Q3 revenue $11.9 billion versus i/b/e/s view $11.46 billion

Sees SUPERB fy 2016 gaap earnings per share $1.46 to $1.49 from continuing operations

Sees SUPERB q4 2016 gaap earnings per share $0.22 to $0.25 from continuing operations

Sees SUPERB fy 2016 non-gaap earnings per share $1.59 to $1.62 from continuing operations

Sees SUPERB q4 2016 non-gaap earnings per share $0.34 to $0.37 from continuing operations

And so on. Yes, all corporate earnings announcements would read like a press release from the Trump campaign, but given the monotony of these statements, I’m certain this is the course of action all companies should take.

[WSJ]

Related articles

Score One for U.S. GAAP

two thumbs up.jpegU.S. GAAP just got a little boost in its image versus its sexy rival, IFRS, courtesy of Audit Integrity, a research services firm.
Audit Integrity studied filings by European companies from 2001 to 2008, looking at filings both pre and post IFRS adoption. The objectives were, “to determine whether IFRS has been implemented consistently across Europe, whether it has resulted in a common method of reporting financial data, and how the depth and comparability of data under IFRS compares to U.S. GAAP.”
At first glance, one might think that with all the bashing of U.S. GAAP in recent years that this was IFRS chance to prove once and for all that it was the new cock of the walk.
Well, not so fast GAAP haters:

“Based on our analysis, we are not seeing a significant improvement in financial reporting when companies shift to IFRS,” said Jack Zwingli, CEO of Audit Integrity. “We found that IFRS is a common standard, but there are significant variances in IFRS reporting, in the completeness of information, the timeliness and the filing frequency.”

Sounds like IFRS ain’t all that does it? You want more?

The firm says overall there are indications that financial reporting is more consistent and more comparable under IFRS than before IFRS adoption in Europe, but it’s not clear that IFRS represents an improvement over U.S. GAAP. In fact, the firm’s report says GAAP filers may have an edge over IFRS filing in terms of the timeliness, depth and breadth of financial data provided to investors.

Ouch, IASB. You want the best part? The Europeans disclose less on executive compensation than we do here in America. You’re all familiar with how popular corporate executives are. To wit:

[Jack] Zwingli [Audit Integrity CEO] said he was also surprised that the analysis revealed IFRS generally provides less information about executive compensation. “It’s not good in the United States, but it’s better than it is in Europe,” he said. “There is more consistency in reporting and deeper coverage of data under GAAP than under IFRS.”

Seems like IFRS has got work to do…IASB, you can call us when you want to get serious.

Study Pokes Holes in IFRS Reporting Quality, Consistency
[Accounting & Auditing Update/Compliance Week]

The Convergence Debate, Already Geeky, About to Get Geekier

Academics in the U.S. aren’t too psyched about the benefits of IFRS, according to Compliance Week:

The United States already meets a high level of reporting quality relative to other countries as a result of various “institutional features,” said [Peter] Wysocki [Professor at MIT]. Those include things like an active investor and analyst community, a rigorous audit process, and oversight by the Securities and Exchange Commission, among others, he said.
“It’s a little difficult to argue a move to IFRS will result in significant improvement in reporting quality,” Wysocki said. “We’re already at a high level because we already have those institutional features in place.

The debate over convergence has reached Biggie/Tupac fever and now that U.S. GAAP has got American bookworms shouting about how IFRS isn’t all that, we expect that academics on the other side of the pond will get involved and the debate will get fiercely geekier.
Academics: Move to IFRS Won’t Boost Reporting Quality [Compliance Week]