(Editor's Note: This article should have published on June 20, 2025, but was delayed due to a technical issue)

 
By Andy Serwer 

Oracle does it. Bristol Myers Squibb does it. Sometimes even Apple does it. Yes, these companies have fallen in love -- with non-GAAP earnings, that is.

Even a casual investor will tell you that more companies these days are eschewing plain-vanilla GAAP earnings -- that's earnings of the "generally accepted accounting principles" variety -- in favor of non-GAAP numbers, which tend to exclude costly noncash expenses like write-offs that make a company look less profitable.

The trend has been building for years. The real questions are: How prevalent has this become, and what is the Securities and Exchange Commission doing about it? Short answers: widespread, and not so much.

A study by Wall Street research firm Calcbench and Suffolk University's Sawyer Business School quantifies the non-GAAP universe. For fiscal 2024, some 351 companies in the S&P 500 index, or 71%, reported either non-GAAP net income or non-GAAP earnings per share. We asked Pranav Ghai, author of the report, if companies were doing this to make themselves look better. "Without a doubt," he says, "Or they would say, 'GAAP makes us look worse.' "

In fact, 89% of those 351 companies reported adjustments making their results look better, Calcbench found. That means 63% of the overall S&P 500 reported higher earnings after accounting adjustments, while only 7.8% had lower non-GAAP earnings. (The balance of all S&P companies had no adjustments.) That kind of math gives one pause.

GAAP was developed by the Financial Accounting Standards Board to provide a standardized set of rules, recognized by the SEC, for companies to follow to ensure their numbers are accurate and to prevent chicanery.

Non-GAAP numbers were to be used judiciously to explain extenuating or extraordinary circumstances, like a factory fire or the sale of a division. Over the years, though, companies -- especially tech firms -- began to exclude items like stock option compensation in non-GAAP earnings, which they then offered as giving a more accurate picture of their businesses.

Today, companies are using non-GAAP earnings to account for everything from amortization of intangible assets to serial restructuring and currency fluctuations. True, they have to reconcile non-GAAP to GAAP earnings -- that is, show how the non-GAAP earnings figure is derived from GAAP earnings. But particularly with tech and healthcare companies, non-GAAP numbers are now more accepted than the "generally accepted" ones.

"Companies used to say they were going with non-GAAP because GAAP made them look less profitable," says Ghai. "Now it's just the way the world works."

Calcbench has been surveying the S&P since 2011, but this is the first time it looked at all 500 companies. In 1996, PwC found that 59% of S&P 500 companies used at least one non-GAAP measure (not just earnings). By 2020, that had climbed to 94%.

Intel had the biggest adjustment last year, according to Calcbench. The chip maker had a GAAP loss of $19.2 billion but categorized $18.6 billion as nonrecurring, so it reported a non-GAAP loss of $600 million. We asked Intel about these charges, and a spokesperson emailed the following statement: "We believe these non-GAAP financial measures provide investors with useful supplemental information about our operating performance." The company noted the adjustments entailed noncash charges.

Ghai says Apple and Microsoft occasionally include non-GAAP numbers when they are warranted, commensurate with the intention of non-GAAP reporting. Oracle, on the other hand, has booked a restructuring charge every year for the past five years, which "doesn't sit well with me," Ghai says. Oracle declined to comment.

"I think there are a lot of investors that want to be misle d," says Jack Ciesielski, an accounting expert and president of investment manager R.G. Associates. "They're going to throw money at anything that puts up better numbers than last year on any basis, whether it makes economic sense or not. And these investors set prices. Companies feed this stupid hunger. As long as the SEC lets them do this kind of reporting within the safe harbors, the frenzy continues."

According to the SEC website, "Generally Accepted Accounting Principles are the accounting standards forming the bedrock of the U.S. financial reporting system." The commission has been warning investors "of various measures of performance" for more than half a century. Since then, non-GAAP has only grown in popularity.

When we asked the SEC if it was concerned about the rise in non-GAAP earnings and whether it was considering any rule changes, it declined to comment. We also asked the FASB and were told, "As a standard-setting organization, we're not in a position to address the difference between a company's GAAP versus non-GAAP earnings. A better source of information would be. . .the SEC."

It's a little bit like the days of Prohibition. We have rules, but those subject to them find workarounds. We devote huge resources to maintaining GAAP standards. To what end? Valuations of software companies that have leaned into non-GAAP earnings for decades haven't been punished. To the contrary. Like banning alcohol, is maintaining the distinction between GAAP and non-GAAP numbers worth the cost?

Hold the phone, says Ciesielski. "No way they should ever make non-GAAP earnings the standard," he says. "GAAP numbers are a lot more standard than non-GAAPs will ever be. They're based on a fair and judicious system of rule-making, not one-off recipes."

Makes sense, though investors should expect plenty of creative cooking going forward.

(END) Dow Jones Newswires

June 23, 2025 21:30 ET (01:30 GMT)

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