Worth pointing out that this is largely a US only problem. Rest of the world uses IFRS which clamped down on that non-GAAP adjustment stuff pretty hard because well it’s not exactly a subtle gambit
I think non-GAAP adjustments were mostly used in the article as a rough marker of "crookedness" that you can measure. Because by far, worldwide, the primary means of fraud involves revenue recognition and other accounting shenanigans (very much recommend the book by the same name) that both IFRS and GAAP are vulnerable to. It's just that's much harder to find that stuff out. But, when the SEC notices a problem with your revenue recognition policies affecting your revenue by a few percent, the SEC comes down on you hard. KHC was an example of that last year or maybe 2 years ago with the new rules in ASC606.
It was news to me that IFRS cracked down on non-GAAP adjustments, particularly because I follow some foreign filers in the US and haven't noticed much of a difference. But then again, I don't follow a lot of companies with the type of management that harps on EBITDA and adjusted EBITDA anyway. According to Charlie Munger, "I think you would understand any presentation using the word EBITDA, if every time you saw that word you just substituted the phrase, “bullshit earnings.”
>It was news to me that IFRS cracked down on non-GAAP adjustments
It's mostly achieved by prohibiting adjustment for "extraordinary items". That stops 90% of this bullshit right there. I gather US GAAP has done the same but kept the concept of non-recurring items.
Whether presenting "Alternative Performance Measures" is allowed at all depends on the country specific regulator. Where they are it's generally in addition to the IFRS measures and if you look at ESMA (EU regulator) they require a reconciliation and various other stuff about fair presentation thereof:
the conclusion that EBITDA == “bullshit earnings” is overblown, or a feint at worst.
EBITDA lets you look at the operational performance of a business in isolation. that is, before financial considerations, where lots of little levers like tax shifting & accelerated depreciation can cook the numbers too.
if you're skeptical about one number on an income statement, you might as well be skeptical of them all (and for most public businesses, you should be skeptical).
edit: should note that "adjusted" anything on a financial statement should tingle the spidey senses.
US governments at all levels love to use GAAP since it lets them use whatever assumptions they want to make up liability numbers for defined benefit pension and retiree healthcare benefits. In fact, the US itself forced non taxpayer funded employers to use strict standards when calculating defined benefit pension liabilities (PPA 2006), but exempted taxpayer funded pension plans from any rules.
This lets current politicians and current and near future recipients of defined benefit pensions to transfer the costs to future future taxpayers.
It is true that governmental accounting standards are different from private sector ones. I believe the GASB promulgates the former; the FASB the latter.
So everybody uses "GAAP" but it's not the same standards nor "whatever assumptions they want". If they used anything else, it would still be "GAAP", too.
Buffett makes non-GAAP adjustments available because GAAP misses important nuances. Also, in the US, security appreciation and depreciation is now reported as earnings (or something ridiculous like that), so it’s pretty important to be able to explain real earnings to your shareholders.
Is there an official list of assumptions used in GAAP? According to the wikipedia, GAAP is just a bunch of very high level principles, such as be honest, consistent, give your best estimate of your finances... But it doesn't seem to prescribe any particular rules to use, just that you use them consistently. And then, what does that mean about non-GAAP ? Does non-GAAP basically allow you to be inconsistent and dishonest or use less than your best guess ?
GAAP just means the local accounting standard. So US GAAP for the USA. UK GAAP mean FRS102 etc.
Non-GAAP essentially means the company decided it's extra special and the standard accounting doesn't capture it's uniqueness. Sometimes that's true but most of the time it's executive not liking what the GAAP number tells them.
A good example is WeWork's "Community Adjusted EBITDA".
Thanks. It is easy to forget how much reporting is specifically about the US, and that a lot of the rest of the world doesn't really have the same problems.
