GAAP, which stands for Generally Accepted Accounting Principles, are like rules that everyone agrees to follow when doing accounting. These rules were made up by a group called the Financial Accounting Standards Board (FASB), and they’re checked by the U.S. Securities and Exchange Commission (SEC). The purpose of these rules is to make sure that when companies report their finances, they all do it in the same way. This makes it easier for investors, banks, and other people who are interested in a company’s finances to understand and compare them. Public companies have to use GAAP, and some private companies, governments, and nonprofit organizations follow these rules too. It’s kind of like a standard everyone uses to make sure financial reports are clear and trustworthy.

The Core GAAP Principles are rules that guide how companies report their finances. They focus on being consistent, clear, and accurate. These rules help ensure that financial statements show a company’s true financial health and performance.

Non-GAAP metrics are different. They involve changing the GAAP numbers to show how profitable a company really is and what its future might look like. These changes remove certain expenses that don’t happen regularly or don’t involve actual money. This gives a clearer idea of how well the company is doing at its core.

Non-GAAP metrics have advantages. They can show steady profits, tell the company’s story better, and remove ups and downs caused by unusual expenses. But they also have downsides. Some people see them as hiding the truth, they can confuse new investors, they’re watched more closely by regulators, and comparing companies becomes harder.

Importance to learn about GAAP and Non-GAAP while valuing a company

We talked about how is a company valued, how to calculate Enterprise valuation, how to calculate multiples to have a better understanding of a company, and take analysis and comparison among two or more companies further. Where did GAAP and non-GAAP come into the picture? Why is it necessary for us to have an understanding of these concepts?

Well, whenever you go to value a company and look at its financial statement you’ll see GAAP and Non-GAAP reported separately or terms like Adjusted EBIT or Adjusted EBITDA or company reporting numbers going from GAAP to Non-GAAP, you won’t get confused and feel what is this strange thing in the financial report? You will have a fair idea of the treatment of non-recurring incomes and expenses and the financial strength of the core financials of the company has been presented. As a company has to bear many expenses that it are not supposed to be borne every year and receives certain amounts that do not come from its core operations as revenue again and again, so they are removed from the statements by adding back non-recurring expenses and deducting back non recurring incomes to see where the company stands in actual financial terms.

For eg. an apparel manufacturing company reports GAAP Net Income of $100 Million in Fiscal Year 2023, but it received some government grants of $20 Million in relation to some unnatural calamity in the country which it will not receive every year and spent $60 million in acquiring a business unit of a company. So this year its net income reduced by $60 million which it do not does every year, its not its nature of business to buy and sell companies. So if I try to look at its Net income without the effect of non recurring transactions, I’ll reduce $20 million from $100 million and add $60 million which will give Non-GAAP Net Income of $140 million. So did you see, how company’s financials improved by doing these adjustments and we got to know the exact position of the company in financial terms.

We’ll deep dive into these concepts in this blog looking at both the terms closely and understanding their treatments. 

What is GAAP?

GAAP, which stands for generally accepted accounting principles, are like rules that businesses follow when they do their accounting. These rules are set by a group called the Financial Accounting Standards Board (FASB), and they’re watched over by another group called the U.S. Securities and Exchange Commission (SEC). 

These principles help make sure that companies report their financial information in a consistent and reliable way. They cover things like how companies recognize revenue (the money they make) and how they share information about their finances. This consistency makes it easier for people, like investors and lenders, to compare different companies and understand their financial health.

Public companies, which are companies whose shares are traded on stock exchanges, and have to use GAAP when they report their finances. But many other types of organizations, like state governments, local governments, some private companies, and non-profit organizations, also use GAAP.

Because so many different types of organizations use GAAP, it’s trusted by investors and lenders. They know that when they look at financial statements prepared using GAAP, they can trust that the information is accurate and comparable. This makes GAAP an important tool for keeping businesses transparent and accountable to the people who rely on their financial information.

Key Points

1. Origin and Oversight: GAAP is rooted in the efforts of the Financial Accounting Standards Board (FASB), which collaborates with the U.S. Securities and Exchange Commission (SEC) to establish and regulate these principles. This collaboration ensures that GAAP remains relevant and adaptable to evolving financial landscapes.

2. Standardization and Objectivity: GAAP’s standardized rules and guidelines promote consistency and objectivity in financial reporting. By adhering to GAAP, businesses ensure that their financial statements reflect accurate and comparable information, enabling stakeholders to make informed decisions.

3. Universal Applicability: While primarily mandated for public companies, GAAP’s influence extends to various entities, including state and local governments, certain private firms, and nonprofit organizations. This broad applicability underscores GAAP’s credibility and utility across diverse sectors.

4. Enhanced Transparency and Trust: Adopting GAAP enhances transparency, and fosters trust among investors, creditors, and other stakeholders. By providing a common framework for financial reporting, GAAP enables stakeholders to confidently assess the financial health and performance of entities.

5. Regulatory Compliance: Public companies are legally required to adhere to GAAP in their financial reporting, underscoring its significance as the standard for corporate accountability. Compliance with GAAP regulations helps companies mitigate risks associated with non-compliance and demonstrates a commitment to transparency and integrity in financial practices.

Generally, GAAP is a cornerstone of financial reporting, offering a comprehensive framework that promotes transparency, comparability, and reliability in corporate disclosures. Its widespread adoption underscores its significance as a trusted standard for assessing entities’ financial health and performance across various sectors.

GAAP Principles

The Core GAAP Principles outline the fundamental guidelines that govern financial reporting practices. These principles are crucial for ensuring consistency, transparency, and accuracy in accounting standards.

Let’s break down each principle:

1. Principle of Consistency: This principle emphasizes the importance of maintaining uniform standards in financial reporting across different periods. It ensures that comparisons can be made accurately over time.

2. Principle of Permanent Methods: Building upon consistency, this principle underscores the need to employ consistent accounting and financial reporting procedures and practices. It enables meaningful comparisons between different financial periods.

3. Principle of Non-Compensation: This principle mandates that all aspects of an organization’s performance, whether positive or negative, must be reported independently. It prohibits offsetting a debt with an asset, ensuring a clear representation of the financial status.

4. Principle of Prudence: Financial data should be reported factually, reasonably, and without speculation. This principle promotes a cautious approach to financial reporting, prioritizing accuracy and reliability.

5. Principle of Regularity: Accountants are expected to adhere to GAAP consistently. This principle ensures uniformity and reliability in financial reporting practices.

6. Principle of Sincerity: Accountants must conduct and report financial information honestly and accurately. This principle emphasizes integrity and transparency in reporting practices.

7. Principle of Good Faith: Similar to sincerity, this principle underscores the expectation that all parties involved in financial reporting act honestly and ethically.

8. Principle of Materiality: Financial reports should disclose all relevant information that could impact the organization’s financial position. This principle ensures transparency and completeness in financial reporting.

9. Principle of Continuity: Asset valuations in financial reporting are based on the assumption that the business or entity will continue to operate in the foreseeable future. This principle provides a basis for assessing long-term financial health.

10. Principle of Periodicity: Entities should adhere to commonly accepted financial reporting periods, such as quarterly or annually. This principle ensures consistency and comparability in financial reporting timelines.

Moreover, GAAP encompasses specific rules governing standardized currency units, cost and revenue recognition, financial statement format and presentation, and required disclosures. For instance, it emphasizes the matching principle, which requires expenses to be precisely matched with revenues for the same accounting period.

In summary, these principles form the backbone of GAAP, ensuring that financial reporting is consistent, transparent, and reflective of the organization’s true financial position and performance.

Fundamentals of Accounting Principles

The fundamental accounting principles are governed by Generally Accepted Accounting Principles (GAAP), which consist of three key components: 10 accounting principles, rules and standards established by the Financial Accounting Standards Board (FASB), and generally accepted industry practices.

1. 10 Accounting Principles:

   These principles play a crucial role in ensuring accurate and transparent financial reporting. They help separate an organization’s transactions from the personal transactions of its owners, standardize currency units used in reports, and explicitly disclose the periods covered by specific reports. These principles also address best practices related to cost, disclosure, matching, revenue recognition, professional judgment, and conservatism.

2. FASB Rules and Standards:

   The FASB issues a comprehensive set of principles known as the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification, which is regularly updated and officially endorsed. These standards build upon the best practices established by its predecessor, the Accounting Principles Board (APB). Both organizations trace their roots to historical regulations established by the federal government after the 1929 stock market crash, which led to the Great Depression.

3. Generally Accepted Industry Practices:

   Not all organizations strictly adhere to the GAAP model. Instead, different industries may follow industry-specific best practices tailored to their unique characteristics. For instance, banks may employ distinct accounting and financial reporting methods compared to retail businesses. These industry practices recognize and accommodate various business sectors’ diverse nuances and complexities.

Overall, the combination of these components within GAAP aims to eliminate misleading accounting practices and foster consistency in accounting and reporting standards. This consistency provides prospective and existing investors with reliable methods to assess an organization’s financial standing. Without GAAP, there would be a risk of using misleading methods that could present a deceptive picture of a company’s financial health.

History of GAAP

In the absence of regulatory standards, companies would have the liberty to present their financial data in any way that best serves their interests. This flexibility could lead to a scenario where companies portray their financial health in a more positive light than reality, potentially deceiving investors.

The Great Depression of 1929, a significant economic crisis that inflicted immense suffering on millions of Americans, was primarily attributed to businesses’ flawed and deceptive reporting practices. As a response to this crisis, the federal government, in collaboration with professional accounting organizations, endeavoured to establish guidelines and rules for the ethical and precise reporting of financial information.

In essence, the absence of regulatory standards could permit companies to manipulate financial data, historically leading to severe economic downturns like the Great Depression. Establishing standards ensures transparency and accuracy in financial reporting, safeguarding investors and the broader economy from misinformation and its adverse effects.

According to Stephen Zeff in The CPA Journal, The terminology of GAAP was first used in 1936 by American Institute of Accountants (AIA). U.S. Securities and Exchange Commission enforced the acts  Securities Act of 1933 and the Securities Exchange Act of 1934 for public companies and the Federal government got public approval for GAAP on the grounds of these acts.

Financial Accounting Foundation (FAF) was formed in 1972 and inspects the operations of Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB).

In 1973, Financial Accounting Standards Board (FASB) was made an independent board on the recommendation of American Institute of CPAs (AICPA). Its board consists of 7 members whose duty is to ensure that the operations are done for the welfare of the general public. The core responsibilities of Financial Accounting Standards Board (FASB) are to monitor GAAP and Codification of Accounting Standards Codification (ASC). 

Its functioning is examined by Financial Accounting Foundation (FAF) and monitored by Financial Accounting Standards Advisory Council (FASAC). Since Financial Accounting Standards Board (FASB) is responsible for Accounting Standards Codification (ASC), FASAC automatically takes responsibility for it. 

Governmental Accounting Standards Board (GASB) was formed in 1984 as a policy board which holds the GAAP creation for government organizations (both local and state).

The boards meet and look at the changes and updations required in GAAP reportings. For eg. when unexpected conditions like Covid 19 came, the boards decided the treatment of the expenses and incomes along with the impact of Covid 19 on the financial statements of the companies. 

What is Non-GAAP?

Whether you’re an investor or part of the board of directors, everyone cares about how much money a company makes. If a company is doing well financially, banks are more likely to lend it money. Investors will want to put their money into it, and relationships with other businesses will improve. When a company has a good reputation for paying its bills on time, suppliers and creditors trust that they’ll get their money even if there are delays. This makes everyday business transactions smoother. 

In standard business operations, a company incurs numerous expenses that are not regular and do not occur repeatedly, yet they are factored into financial statements known as GAAP figures which carries the picture away from the core profitability of the business. Hence, the company adds back all non-recurring and non-cash expenses omitted during EBIT calculations (such as inventory write-downs, COVID-related expenses, business transformation and integration costs, offering-related expenses), and subtracts all non-recurring incomes included in EBIT calculations (such as insurance claims, government grants, asset disposals). These adjustments result in the final figure falling under non-GAAP numbers which ultimately showcase the actual future value of the company.

Let me give you an eg. with which you’ll get the relevance of calculating Non GAAP numbers from GAAP numbers. 

In the United States, Neumann wasn’t the sole individual presenting his interpretation of ‘apple’. In 2015, Valeant Pharmaceuticals, purportedly accustomed to utilizing non-GAAP metrics for an extended period, unveiled its financial figures. Despite recording a GAAP loss of $291.7 million, the company disclosed an ‘adjusted’ non-GAAP profit of $2.84 billion by excluding amortization of intangible assets, acquisition expenses, and other costs.

 I’ll talk about the benefits and downfalls of reporting Non GAAP numbers in some while.

Most companies report both GAAP and Non-GAAP numbers, and it has become essential these days. Companies invest and are supposed to record those investments as expenses in financial statements following the GAAP reporting method. As a result, their net profit was reduced. Expenses like Research and Development Costs, acquisition expenses, stock issue-related costs, restructuring, branding, promotion, consumer relationship management, public relations expenses, human resource management enhancement, etc., are not core to the business’s operations.

Still, they are incurred for the betterment and growth. And have to be reduced in the calculation of EBIT(Earning Before Interest and Taxes), which eventually reduces the company’s Net Profit. The more intangible expenses the company will incur for its future growth, the more reported losses with time. Thus, the Net Profit would be an inadequate indicator of the company’s future profitability. 

Analyzing some most prevalent Non-Recurring Expenses

Some non-recurring expenses mentioned above include stock-based employee compensation, write-off acquired intangibles, and restructuring charges. If we talk about stock-based compensation (including shares and options) specifically, while calculating net profit and stock-based compensation is reduced, it is considered an expense for the company. Yes, it’s an expense, but a non-cash expense that is not paid to its employees in cash, which, when added back, makes the numbers much better. On top of that, when an employee exercises his/her stock option, the company gets a 10% tax rebate. 

Write-off acquired intangibles

The same is the case with acquired intangible assets. The major chunk of the deal value is for the intangibles of the target company acquired. For eg. Facebook paid $17 Billion just for the Intangible Assets of WhatsApp in 2014. The companies check if such a heavy amount they have paid to acquire the company’s intangibles.

If there is any value reduction, they reduce intangibles’ value while calculating GAAP Profit to that extent. So, while calculating Non-GAAP Profit, we add it back to nullify its impact on the actual financial health of the company.

To give you a context here, let me share an example. Procter & Gamble recorded $6.8 billion of Goodwill Impairment in 2019 associated with the acquisition of Gillette it did in 2005. In fiscal 2019, they found out that the value we thought our Shave Care business was worth was actually less than what we had it listed for on their books. So, they had to do a test to see if the value of the things they own and owe in that business matched up with its new estimated value.

They found out that some of the value of their Gillette asset wasn’t as much as they thought it was. Because of these findings, they had to report that they lost value in both these areas, even though no actual money changed hands.

They had already mentioned earlier that the value of their Shave Care business and the Gillette asset had been going down in recent years, especially during the year ending June 30, 2019. This was mainly because the money in different countries wasn’t worth as much compared to the U.S. dollar, fewer people were buying grooming products, especially in rich countries, and there were more companies competing in the U.S. and some other places, which meant they were making less money than they thought they would.

They had to report a loss of $6.8 billion for the Shave Care business and $1.6 billion for the Gillette asset. After the loss they reported, the Shave Care business was valued at $12.6 billion, and the Gillette asset was valued at $14.1 billion.

Restructuring Charges

Talking about restructuring costs now, due to constant innovations in every sphere nowadays, leads to the need for it to be updated. With this, companies are forced to sell their business segments, sometimes at a loss and are supposed to pay severance charges to the workers obviously. Severance costs are the money and things that employers need to give to their workers when they stop working for the company. These costs are deducted when calculating the GAAP profit.

Still, there is one thing which needs to be kept in mind at this point is that the companies don’t sell their segments every day, and it is not their core business nature, so the GAAP Profit for that particular quarter and year in which the segment has been sold will get reduced. So, to get back to the actual financial position of the company, we add back the costs incurred related to divesture and calculate Non-GAAP Profit. For eg. Logitech International S.A. incurred $2.2 million for the fiscal year 2022 as Restructuring expenses.

Looking at another example:

Disney had to incur $3.9 Million Restructuring and impairment charges in 2023. The company changed how they choose content for our Entertainment Direct-to-Consumer services. They got rid of some content and stopped some agreements with other companies to use their content on our platforms. This cost them $2.6 billion in 2023. They had to write off $2.0 billion for content they already made and $0.6 billion for ending agreements.

They also paid $0.4 billion in cash to end these agreements. Their predictions showed that the value of our entertainment and international sports networks was less than what they thought, so they had to report a loss of about $0.7 billion in their financial statements. In 2023, they also paid $0.4 billion for employee severance, $0.1 billion for an investment that lost value, and $0.1 billion for leaving their businesses in Russia.

Have a look on a hypothetical example now-

Firms turn their financial statements from being in losses to being profitable because the non-cash expenses they had to deduct while calculating GAAP Profit/Loss are added back while calculating Non-GAAP Profits. For example, a company did a restructuring activity worth $31 million, stock-based compensation was $11 million, impairment goodwill was $6 million, and government grants were worth $4 million, making a GAAP loss of $39 million. If the company reports non-GAAP numbers, its losses would quickly turn into Profits because all these expenses are non-cash, and the company didn’t actually pay for them. So, adding back $31 million, $11 million, and $6 million, reducing $4 million, would give a non-GAAP profit of $5 million. 

Benefits and drawbacks of reporting Non-GAAP Numbers

Benefits

1. Demonstrates consistent or recurring profits:

Using different ways to measure how well a company is doing can be helpful. One way is to look at something called EBITDA, which shows how much money a company is making before considering certain expenses. Another way is to look at adjusted EBITDA, which is like EBITDA but takes out certain expenses that aren’t expected to happen again.

For companies that are just starting to sell shares to the public (IPO firms) and are spending a lot of money to grow, it’s important to see if they can make money regularly. These firms often show adjusted EBITDA to give investors a better idea of how well they can make money over time.

When companies talk about adjusted EBITDA, they usually remove things like one-time costs for things like changing how they operate or buying other companies. They also take out costs related to stock-based compensation, which is when employees are given company shares as part of their pay. This is common, especially in technology companies, to attract talent and reward key people before the company goes public.

While some people might disagree about taking out stock-based compensation when looking at earnings, many experts agree that it’s reasonable to exclude certain costs to show how much money a company can make regularly. It helps to see if a company’s earnings are sustainable over time.

2. Managers can more effectively articulate the company’s actual financial health:

Non-GAAP metrics help managers show the consistent performance of the main parts of their business. They also help explain any strange financial effects that don’t reflect the usual trends of the business. Additionally, they make it easier to understand the most important financial aspects of the company’s core operations.

Managers need to be careful in how they talk about non-GAAP metrics. They should explain why these metrics are helpful for investors and clarify any changes made to the numbers. By doing this, investors can better understand and use these metrics to make decisions. Moreover, discussions about how the adjusted metric is used internally give insights into how the business is run, which isn’t always clear from standard accounting measures.

3. Eliminates the fluctuating impacts of business:

Adjusted metrics often exclude temporary or one-time occurrences that cause fluctuations in companies’ earnings and cash flow patterns. Eliminating these unstable factors has been demonstrated to improve investors’ ability to predict companies’ future financial results. Occasionally, these transient factors are beyond management’s control, and excluding them from GAAP-based performance metrics can encourage a focus on long-term objectives among management.

In other words, non-GAAP calculations enable management to concentrate on activities that enhance long-term value, such as restructurings, without worrying about short-term expenses that could impact financial performance metrics. Indeed, studies show that corporate boards are more inclined to utilize adjusted earnings metrics for assessing management performance when GAAP earnings exhibit greater volatility.

Drawbacks

1. Can be viewed as ‘window-dressing’:

The selective adoption of non-GAAP metrics by certain companies has caused investors to doubt management’s true intentions and the significance of these metrics. However, managers can alleviate such skepticism by adhering to regulatory standards, transparently communicating adjustments to investors, maintaining consistency in non-GAAP calculations over time, and consistently factoring in items that affect the non-GAAP metric, whether positively or negatively. Regulatory bodies, standard-setting organizations, and industry professionals strongly advise companies and their audit committees to establish policies regarding non-GAAP disclosures to guarantee the uniformity and clarity of such metrics.

2. May cause confusion among inexperienced investors:

Research indicates that retail or less experienced investors tend to place more trust in non-GAAP metrics compared to sophisticated, institutional investors. Moreover, retail investors are prone to misunderstanding the adjustments made to calculate non-GAAP metrics. These findings carry implications for publicly traded companies with a significant proportion of retail investors among their shareholder base. In such instances, management should prioritize the clarity and consistency of their non-GAAP disclosures to facilitate better comprehension among novice investors regarding the company’s financial performance.

While sophisticated investors display less reliance on non-GAAP measures, IPO investors, primarily comprising large institutions, utilize these metrics as indicators of firm value, particularly due to the limited availability of reliable financial information about private companies beyond the prospectus. However, IPO investors may harshly penalize new issuers for overly aggressive non-GAAP disclosures. It is noted that investors tend to undervalue IPOs significantly when excessive non-GAAP adjustments are disclosed, with this valuation penalty being particularly pronounced for technology IPOs.

3. Can face heightened regulatory examination:

Because non-GAAP metrics can be controversial, companies need to be ready for extra attention from regulators if they choose to use adjusted financial metrics in their reports. According to Audit Analytics, problems related to non-GAAP measures are the second most common reason for comments from SEC staff during the filing review process. To avoid potential issues and costs from regulatory scrutiny, management should follow the rules and have strong policies for disclosing non-GAAP information.

In the context of an Initial Public Offering (IPO), if a prospectus includes non-GAAP measures, it might raise concerns for the SEC staff, possibly causing delays in the IPO listing. Uber’s IPO is an example; it faced a lengthy review process with multiple rounds of comments, many of which focused on how Uber presented its non-GAAP information.

4. Makes it hard to compare one company to another:

A big problem with non-GAAP measures is that they’re not the same across different companies. Each company makes its adjustments, so it’s hard for investors to compare how well companies are doing. To fix this, experts suggest that companies, even those going public for the first time, should try to use the same non-GAAP measures that other companies in their industry use. If a company’s measure is different, they should explain why so investors can understand and compare properly.

GAAP V/S Non-GAAP

For a better understanding of both reporting methods and to identify your accounting practice, I would like you to go through the differences between GAAP and Non-GAAP. Some basis on which we can differentiate them are listed below:

Basis of differentiation	GAAP	Non-GAAP
Mandate	Financial reporting standard required to be followed by US public companies	Not a rule that every company has to follow. Both private and public companies can decide whether to use it alone or along with GAAP
Regulatory Status	Closely watched and controlled by the FASB and SEC	Follows the guidelines set by the SEC
Intent	To accurately show how well a company is doing financially.	To make adjustments for a true picture of core company financials
Non-recurring expenses treatment	Included in financial statements	Excluded from financial statements
Rules to be followed	Some transactions are to be considered as expenses and incomes by rules and standards	No specific rule to consider a transaction as an income or expense
Uniformity	Uniform disclosure of financial statements across all public and private companies	Since adjustments are dependant on analyst’s discretion, there could be some differences or inconsistencies
Comparability	Companies are easily comparable due to standard disclosure methods	Sometimes non-comparable because a company might consider an expense/ or an income as non-recurring the other might not.
Time frame for reporting	Binds companies to follow accrual-based accounting method in which all the incomes and expenses are to be recognized in the same year of transaction not when money actually changes hands	No specific reporting period

To summarize..

In essence, the matter revolves around the concept of Generally Accepted Accounting Principles (GAAP) and the use of Non-GAAP (Generally Accepted Accounting Principles) measures in financial reporting. Here’s a concise summary:

GAAP

• Definition: GAAP stands for Generally Accepted Accounting Principles, which are standardized guidelines for accounting established by the Financial Accounting Standards Board (FASB) and overseen by the U.S. Securities and Exchange Commission (SEC).
• Purpose: GAAP provides a uniform framework governing financial reporting, enhancing objectivity, and reliability across various industries. It ensures consistency and accuracy in corporate disclosures, facilitating comparisons among companies for stakeholders.
• Key Points: Originated in response to the 1929 stock market crash, GAAP is mandated for use by all public companies, extending its influence to state and local governments, private firms, and nonprofit organizations.
• Principles: GAAP encompasses core principles such as consistency, permanence, non-compensation, prudence, regularity, sincerity, good faith, materiality, continuity, and periodicity.

Non-GAAP

• Definition: Non-GAAP measures involve adjustments to GAAP figures to reflect the actual future value of a company, by excluding non-recurring and non-cash expenses from EBIT calculations.
• Purpose: Non-GAAP numbers aim to showcase the core profitability of a business, eliminating temporary fluctuations and providing insights into its long-term financial health.
• Examples: Non-GAAP adjustments include excluding expenses like stock-based compensation, write-off acquired intangibles, and restructuring charges from GAAP profits.
• Benefits: Non-GAAP metrics help demonstrate consistent profits, articulate the company’s narrative effectively, and eliminate fluctuating impacts of business.
• Drawbacks: Non-GAAP measures can be viewed as ‘window-dressing’, causing confusion among inexperienced investors, facing heightened regulatory examination, and making it challenging to compare companies.

In summary, while GAAP serves as the standardized framework for financial reporting, Non-GAAP measures provide insights into a company’s core profitability, albeit with potential drawbacks and regulatory scrutiny. Understanding both GAAP and Non-GAAP measures is crucial for stakeholders in assessing the financial health and performance of companies.

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