Section 4: GAAP Versus Non-GAAP

GAAP Versus Non-GAAP

Understanding GAAP

Generally Accepted Accounting Principles (GAAP), also known as Accounting Standards, constitute a standardized framework of guidelines that accountants adhere to when recording transactions and preparing financial statements. GAAP ensures consistency, reliability, and transparency in financial reporting.

The Role of Non-GAAP Measures

Many companies and financial analysts also employ non-GAAP measures, which often present a more favorable financial picture. Beyond enhancing the appeal of press releases, non-GAAP figures provide analysts with a more insightful means of assessing a company's growth relative to its peers.

Accessing GAAP and Non-GAAP Figures

To obtain GAAP figures, refer to a company's most recent quarterly or annual filings and examine the income statement. Non-GAAP measures can be found in similar reports, as well as in press releases and historical and future earnings projections. Earnings per share (EPS) are typically indicated as GAAP or non-GAAP, though sometimes this qualification is omitted. Additionally, it is crucial to differentiate whether EPS is presented on a basic level or a fully diluted level, information that can also be found in the income statement.

Components Excluded in Non-GAAP Numbers

The specific items excluded in non-GAAP figures can vary by industry but generally include amortization of intangibles, share-based compensation expense, restructuring charges, senior debt amendment fees, and gains or losses on the extinguishment of debt. It is important to recognize that these expenses are material to the company's future success. Analysts prefer non-GAAP numbers to better evaluate core growth prospects.

Utilization by Company Management

Company management also relies on non-GAAP figures to comprehend, manage, and evaluate business results and to make operational decisions. Decisions regarding staffing, management priorities, and the allocation of future operating expenses are often based on non-GAAP measures.

Although non-GAAP results are also generally accepted, it is crucial to thoroughly examine the differences between them and GAAP results to identify any potential red flags. Are non-GAAP earnings showing an upward or downward trend in direct correlation with GAAP earnings, or is there a noticeable discrepancy? Is the company allocating excessive amounts towards restructuring charges or financing expenses relative to their non-GAAP results? How does the company's historical variance between GAAP and non-GAAP figures compare with that of its competitors? These are all pertinent questions, especially when evaluating potential value and growth opportunities.

Typically, companies that utilize non-GAAP figures will provide a table or another easily comparable reconciliation review either in their quarterly or annual reports or in a supplemental press release. This method usually offers a straightforward summary of the variances between GAAP and non-GAAP metrics, including top-line, bottom-line, margin, and per-share differences.

Understanding the Four Fundamental GAAP Principles

The realm of Generally Accepted Accounting Principles (GAAP) and the ever-evolving, often perplexing landscape of accounting standards are crucial for business owners to grasp. Employing a virtual bookkeeper and a part-time financial controller can significantly alleviate the burden of comprehending the intricacies of GAAP accounting standards. This is essential, considering the myriad responsibilities you already shoulder.

Nevertheless, appreciating the importance of GAAP is vital when selecting the right virtual bookkeeper and ensuring your in-house bookkeeping staff adheres to these standards. Accountants dedicate years to studying, memorizing, and mastering GAAP standards. Our aim is to provide you with fundamental insights so you can identify any discrepancies in your bookkeeping practices and understand the significance of GAAP when evaluating potential virtual bookkeepers. Adherence to the four basic GAAP principles by your bookkeeper ensures accurate bookkeeping, which is instrumental in making informed financial decisions for your company.