The head of the International Accounting Standards Board is echoing concerns abroad also voiced by leaders of the U.S. Securities and Exchange Commission about the increasing use of non-GAAP measures in the financial statements of public companies.
Speaking Wednesday at the annual conference of the European Accounting Association in Maastricht, the Netherlands, IASB chairman Hans Hoogervorst pointed to the widening difference between GAAP and non-GAAP numbers in financial reports. SEC chair Mary Jo White, chief accountant James Schnurr and deputy chief accountant Wesley Bricker have also warned against over-reliance on non-GAAP metrics in recent months.
Hoogervorst called for remuneration committees and investors to be aware of the potential pitfalls of basing policies and decisions on non-GAAP figures, saying they are often “sugar-coated” adjustments made by management.
While reducing the prevalence of non-GAAP measures is mainly the task of securities regulators, Hoogervorst believes the IASB also has a role to play. International Financial Reporting Standards currently provide relatively little detail on the formatting of the income statement, which can encourage the use of non-GAAP measures, he acknowledged.
Describing potential remedies the IASB may consider, Hoogervorst said, “We may need to define more subtotals in the income statement; provide a definition of operating income which does not allow for obfuscating restructuring or impairment charges; and create a rigorous definition of the commonly used non-GAAP metric EBIT. We may have to do all of the above—and maybe more.”
Hoogervorst, however, reaffirmed that the bottom line, profit or loss, will remain the most important performance measure over time. “No one can predict the extent to which seemingly extraordinary elements of income are recurring and not,” he said. “That is why it is important that the bottom line is as inclusive as possible and that it shows everything, warts and all.”
In his speech, Hoogervorst recognized the importance of academic research in standard-setting and called upon academics to remain active in reviewing and commenting on IFRS and the standard-setting process.
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