A call to eradicate Non-GAAP
Accounting is the universal language of business; it provides a medium for all investors to comprehend the financial position of a business.
As companies become increasingly complex, accounting standards have followed suit.
Most companies now regularly report GAAP and Non-GAAP earnings. Some argue company inclusion of Non-GAAP measures seeks to artificially boost performance perception.
While this may be true in some cases, the sheer volume of companies issuing Non-GAAP measures is astounding.
The “Generally Accepted Accounting Principles” are clearly not “generally accepted”.
Such is the case with a recent amendment to GAAP: FASB update 2016–01, Subtopic 825–10.
In short, this 232-page Standards Update requires companies to include unrealized gains & losses on marketable securities in the income account.
To a typical investor, this results in earnings that reflect not only actual income, but also theoretical capital gains in the period.
This is insane.
If a company holds its own stock while the stock appreciates in value, this unrealized appreciation will be reflected as “increased earnings”.
As such, it’s conceivable that the stock price would increase, resulting in additional superficial earnings increases, subsequently driving the stock price even higher.
This type of derivative logic is dangerous and can quite conceivably end in a bubble — ignorance resulting in the gross mis-pricing of assets.
Eradicating the use of Non-GAAP measures is an uphill battle, but this is an important and worthy goal, the efficiency of our markets depends on “generally accepted” principles.
Easier said than done, but some common sense would be a good start.