Reporting continues to be a hot topic in the corporate finance space. Stakeholders want to know that the company is heading in the right direction, top brass needs to know how to steer the organization, and potential investors want accurate pictures of their investment.
But reporting today can be unique to each company. Yes, there are GAAP measures—the things you’re required to answer—but there are also measures that can paint a clearer picture of how your company works. A software company and a manufacturing firm are each going to have required GAAP metrics, but to really show off trajectory, non-GAAP metrics can help add context to the real numbers.
The 2010s Renaissance of Non-GAAP Measures
Over the past decade, these metrics have evolved and become more popular. Between the dot-com bubble and 2010, many companies avoided the use of non-GAAP measures, fearing brushback if an investor was to rely on an unreliable metric. But following the relaxing of rules in 2010, use of non-GAAP measures ‘exploded’ according to the Wall Street Journal.
Metrics slowly became more business friendly, real-time, valuable, and transparent as companies moved toward taking a Do-It-Yourself approach to financial reporting metrics that are not required by accounting rules.
Today, however, in the wake of the COVID uncertainty and the regulatory burden expected in coming years, companies should plan for more disclosures and scrutiny, according to Deloitte. In their analysis on the benefits and challenges of non-GAAP reporting, authors noted that while these metrics can be a powerful tool for communicating with investors and analysts, those generating the numbers need to tread carefully.
Changing Focus in Non-GAAP Reporting
Since 2015, the SEC has continued to increase scrutiny on companies using this information. After seeing the increased use and prominence of these numbers and the potential that companies could be using misleading data, they set out to provide balance between telling a story and telling the truth.
Should You Update Non-GAAP Reporting in the New Normal?
Companies faced a lot of pain after the outbreak of COVID. But non-GAAP measures seemed unchanged. This creates questions. According to Deloitte,
“Following the emergence of COVID-19, one of the key areas of focus for the SEC was the impact the pandemic might have on non-GAAP reporting for public companies. As the impacts of COVID-19 continue to reverberate, recent non-GAAP reporting of companies has indicated that COVID-19 has not resulted in significant changes in terms of the types of adjustments used by management in developing non-GAAP measures.”
Knowing this, of the companies that did incorporate COVID-19-related non-GAAP adjustments, many were associated with activities that are often included in non-GAAP adjustments but were described as being caused by or related to the impact of COVID-19.
Readjusting Non-GAAP Measures to Reflect a Changing Business Environment
Non-GAAP measures likely need to reflect new circumstances that have become focus areas of management and stakeholders, rather than existing to paint a company positively. Deloitte adds,
“For example, companies may have redefined non-GAAP measures to include or exclude certain adjustments related to cash flows that were not previously included such as dividends or certain classifications of capital expenditures.
Companies may also determine that new non-GAAP measures are more relevant than non-GAAP measures used in the past due to the evolving focus of the users of financial statements, such as a heightened attention to liquidity. Accordingly, a company may begin to report a liquidity based non-GAAP measure that was not a focus in previous years.”
Focusing Non-GAAP Efforts in 2021 and Beyond
Should you start using non-GAAP measures? Should you refine ones that you currently use? Deloitte notes that non-GAAP measures can be a meaningful way to supplement GAAP numbers for a complete picture of business operations and liquidity, providing information that is not easily available in financial statements.
Sometimes, these measures can help to clarify, other times they cut a few steps out of the process that analysts and investors normally take. Either way, they need to be reliable, accurate, and usable—complying with all of the latest guidelines while painting a picture of your business.
Learn More: Business Intelligence Simplified for Corporate Finance
With a job title like CFO or Controller, you need to keep up with all the latest at your organization to understand how it affects the finances.
The right metrics can help both public and private companies to make the most of their return. Business intelligence can help. If you’re looking to make the most of your numbers, we invite you to watch our on-demand webcast titled Business Intelligence: Simplified for Corporate Finance. Featuring panelists Amir Bednarsh, Corporate Controller, at Kayco and Jory Weissman, VP of Sales at MIBAR, this on-demand webcast discusses how business intelligence gave Kayco an interactive, customized, and remarkably user-friendly reporting environment to provide users 24/7, cross-device and real-time access to their data.
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