Financial Execs Weigh Non-GAAP versus GAAP Use

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Financial executives are coping with an onrush of new accounting standards that are taking effect in the next few years, along with demands from the Securities and Exchange Commission to temper their companies’ reliance on non-GAAP measures.

“I think there’s a tremendous amount of change,” said Neri Bukspan, an assurance services partner in Ernst & Young’s Financial Accounting Advisory Services practice. “Companies that have many operational initiatives in front of them also have to deal with rev rec, leasing, credit losses and a number of simplification projects. These are all significant projects. They all require changes in processes, systems, controls and policies, along with dedication of personnel, resources and appropriate expertise. Needless to say, it is a very difficult period for financial executives who have to deal with other run-of-the-mill initiatives that are quite significant.”

Bukspan spoke on a panel about the controversy over non-GAAP measures at Financial Executives International’s Current Financial Reporting Issues conference in New York on Monday.

“GAAP is predominantly backward-looking,” he told Accounting Today during an interview at the conference. “GAAP depicts historical performance and GAAP is imperfect. If it were perfect, there would not be much debate about what GAAP depicts and how items be accounted for. There is disparity between book values and market value, and the large majority of intangibles are not accounted for. Many investors have been adjusting companies’ financial reports for many, many years. This is the role of an analyst.”

In contrast, non-GAAP measures can provide investors with more forward-looking information.

“In addition, it’s important to know not only what you did last year because for example, if you have a significant restructuring you may not have it next year,” said Bukspan. “If you have a significant M&A transaction, you may not have it next year. If you have significant litigation that’s looming, and if you didn’t have litigation expenses last year, you may want to build some large litigation settlement into your discussion with your investors. The role of non-GAAP measures is to complement and supplement GAAP financials.”

However, he understands why the SEC provided guidance earlier this year on how companies can use non-GAAP metrics without abusing them.

“The SEC was appropriately challenging companies when they shared them with investors, but the presentation has to be appropriate,” said Bukspan. “The presentation has to lend itself to greater understanding and transparency rather than lesser transparency. The investor should be informed about what is the nature of the adjustment, why the adjustment is being made. Make sure that companies and analysts are using them for the reason they were first envisioned.”

Non-GAAP measures can give investors a better sense of how management sees the business, not just through the lens of the accounting standards.

“Last but not least I do believe that companies are encouraged by the SEC to share their view of the way they believe management sees the business,” said Bukspan. “It’s almost incumbent on managements to share with the market what are they using as their KPIs, what are the metrics they are using to manage their business. Clearly it’s got to be very clear and transparent why they feel that’s the way. It’s got to be impartial. It should not introduce improper bias. If done at that level, I think it has great information value to the market, and it has great information value to FASB in considering possible enhancements to its standards.”

Convergence and Divergence
Bukspan has been closely watching the Financial Accounting Standards Board rolling out new rules, along with its differences with the International Accounting Standards Board after the two boards worked for a decade on converging U.S. GAAP with International Financial Reporting Standards.

“Sometimes there’s no one size fits all for accountants when they consider the ‘appropriate accounting,’” said Bukspan. “Different boards [FASB and IASB] can think about different things and conclude different things on similar conceptual issues. If there is no governance process that forces a consensus decision, it’s not likely that each board would reach the same decision, given their different preferences and priorities. This is to be expected.”

Despite the two boards’ differences over the leasing and credit loss standards, Bukspan still sees agreement between them in many ways.

“The interesting thing is that we’re becoming more converged than we’ve ever been, but we are not as close as we were hoping to be when the convergence projects started,” he said. “What does it mean? Particularly for multinationals, they have to deal with two different systems of accounting. They always had to deal with it, and sometimes they had to deal with a few dozen national GAAPs. Now they only have to deal with two, but they still have to adopt the new leasing standard and the new credit losses standard, which are different under U.S. GAAP and IFRS. They still have to maintain dual expertise and look at what the two boards are doing. It introduces certain costs into the system. On the other hand, it introduces healthy tension into what the appropriate accounting depiction of economic phenomena may or may not be. Investors are going to have to learn what the differences are because it could influence their decision when comparing companies across jurisdictions.”

Future FASB Agenda
FASB has sent out a consultation on what should be on its future agenda. Bukspan would like to see FASB focus on improving some of its basic frameworks for accounting standards.

“From my own perspective, I believe the conceptual framework is important,” he said. “I do believe that addressing the disclosure framework is also quite important because it’s going to facilitate certain elements where disclosures can serve to better complement and supplement certain important areas in accounting.”

FASB is also considering making improvements in the areas of pension accounting, liabilities and equity, and financial performance reporting.

“Pension accounting has been kind of a recurring theme over the past two decades,” said Bukspan. “It’s going to be interesting to see whether people are really interested in a fix for pension accounting and, if so, what’s the impetus for the change because there’s a lot of information about pensions already out there. I wonder if this would be at the top of my own priorities with respect to projects the FASB is working on. Liabilities and equity is a project that has been in play for the FASB for many years. It’s a complex issue. It drives a lot of elements within the financial reports. Given that it has been discussed for 30 years, I think it’s worthy of taking it up and bringing it to some conclusion. Another one to watch is the FASB Financial Performance Reporting project, including its broader research on potential improvements to the income and the cash flows statements.”

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