GAAP vs non-GAAP measures

GAAP — US generally accepted accounting principles, set by the FASB — defines how the figures in the financial statements are measured. Revenue, operating income, net income and diluted EPS as presented in a 10-K or 10-Q are GAAP measures.

A non-GAAP financial measure is a numerical measure of performance, financial position or cash flows that adjusts a GAAP figure by excluding or including amounts. Adjusted EPS, adjusted EBITDA, free cash flow and organic revenue growth are common examples. Operating metrics such as unit sales or subscribers, and ratios calculated entirely from GAAP figures, are not non-GAAP measures under the SEC definition.

Regulation G applies whenever a public company discloses a non-GAAP measure publicly — in a press release, presentation or call. It requires the most directly comparable GAAP measure to be presented alongside, a quantitative reconciliation between the two, and that the measure not be misleading. For forward-looking measures such as adjusted EPS guidance, the reconciliation is required only to the extent it is available without unreasonable efforts, and the company must say what it cannot provide.

Item 10(e) of Regulation S-K adds requirements for non-GAAP measures in SEC filings: the GAAP measure must be presented with equal or greater prominence, and the company must explain why the measure is useful. It also prohibits, among other things, excluding cash-settled charges from liquidity measures (other than EBIT and EBITDA) and labelling an item non-recurring when a similar item occurred in the past two years or is reasonably likely to recur within two years. Earnings releases furnished under Item 2.02 of Form 8-K must meet the prominence, reconciliation and usefulness requirements as well.

SEC staff guidance (the Compliance and Disclosure Interpretations on non-GAAP measures) adds that excluding normal, recurring cash operating expenses can be misleading, as can applying accounting methods that differ from GAAP to individual line items.

The reconciliation table, usually near the end of an earnings release, starts from the GAAP figure and lists each adjustment. Reading it line by line shows what was removed: common items are stock-based compensation, amortization of acquired intangibles, restructuring charges, litigation costs and gains or losses on investments, each with its tax effect.

Useful checks: whether the same adjustments appear every quarter (a "one-time" charge that recurs is an operating cost), whether gains are removed as consistently as losses, and how the gap between GAAP and adjusted figures changes over time.

Financial charts on Aerarium are built from the figures companies tag in the XBRL of their SEC filings (10-K and 10-Q, and 20-F or 40-F for foreign filers), under each company's own reporting framework: US GAAP, or IFRS for some foreign filers. Derived figures such as free cash flow and EBITDA are computed the same way for every company from those filed figures, rather than taken from each company's own adjusted presentation.

Earnings calendars and analyst estimates usually work on the adjusted basis, so the EPS shown next to an estimate can differ from the GAAP diluted EPS charted for the same quarter. Both can be correct; they measure different things.