Analysis: Officials Warn Non-GAAP Financial Measures May Lack Credibility

Virtually all of the S&P 500 companies have posted earnings this season, and the figures have certainly skewed positive.

As of June 1, 78 percent of S&P firms reported earnings above consensus estimates, and 76 percent have reported greater sales than expected.

A strong earnings season may have provided the stock market with a much-needed shot in the arm, after the major indices fell into correction territory amid macroeconomic concerns in late March. Since then, the S&P has rebounded to pare those losses despite lingering macro uncertainty.

The catch: some are questioning the integrity of the numbers being reported. This is because 88 percent of S&P companies have reported “adjusted” results.

What It Means

Companies are allowed to report their own accounting figures that differ from GAAP, the set of standards required by the Financial Accounting Standards Board, as long as the GAAP numbers are reported too.

These non-GAAP measures, also known as operating or pro forma earnings, are purportedly meant to smooth out earnings volatility resulting from transitory conditions and events, but have long been suspected of being more useful to corporate managers in need of a crutch than to shareholders seeking to understand the company’s performance.

“The use of non-GAAP numbers is more prevalent now than before,” Dr. Howard Bunsis, a professor of accounting at Eastern Michigan University, told Benzinga in an email. “The majority of earnings announcements seem to have these non-GAAP statements and references, telling investors that it is the non-GAAP numbers that matter.”

Why It’s Important

History records a widening spread between S&P operating and reported earnings in the late stages of an economy’s expansion phase, with incremental increases driven by drops in reported earnings.

In the present expansion stage, the increase in spread originates from a rise in operating earnings, rather than a

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