Mind the non-GAAP


Robert Morgan


Given the prolific use of non-GAAP measures by companies in their financial reporting, many investors have concerns about their use.

Audited financial statements remain a critical foundation for financial analysis, capital allocation and investment decisions. Despite this importance, the financial statements represent only a fraction of all information used in financial analysis.

Many companies also use non-GAAP measures (that is, those that are not prescribed by generally accepted accounting principles, such as those from the IASB or FASB) or alternative performance measures (APMs) to demonstrate their performance. Some examples include operating earnings, cash earnings, EBITDA (earnings before interest, taxes, depreciation and amortization) or, more recently and famously, ‘community-adjusted EBITDA’, a measure used by the now-beleaguered WeWork company.

IFRS and US GAAP do not provide a perfect ‘one-size-fits-all’, and therefore non-GAAP measures can be a useful tool to help companies monitor their business, make strategic decisions and explain company performance. By virtue, this makes these non-GAAP measures important to the investment community. When they are used properly, non-GAAP measures can provide transparency and clarity. 


The CRUF has concerns that when these measures are not used appropriately, non-GAAP measures are open to misunderstanding and abuse, and their improper use can cloud the view of a company’s performance.  Definitions also can change year-on-year within the same organisation. A recent piece from Bloomberg highlighted this issue: 

Companies have also created favorable measures to describe their performance, with big variations from their audited results. WeWork Companies Inc. invented a metric called ‘community-adjusted EBITDA’—earnings before interest, taxes, depreciation and amortisation—to strip one-off costs from its results. It declared a community-adjusted EBITDA of $233 million for 2017, while its audited financial reports that year showed a net loss of $933 million… 

When referring to operating profit, a statement of income from normal operations, but one for which there is no agreed definition. This ambiguity allowed Carillion Plc to declare a healthy profit shortly before its 2018 collapse, with a subsequent parliamentary report slamming its use of aggressive accounting policies to effectively overstate its results…

While the CRUF believes very strongly that there is a clear need for non-GAAP data for users of financial statements, there are  some areas of particular concern with non-GAAP measures and they depend on whether they are used within the financial statements or outside the financial statements:

  1. For those measures used within the financial statements, we believe that analysts and investors need better consistency in their reporting. When corporate information is presented on different bases without clear comparability, proper financial analysis becomes more difficult. Additionally, these measures should not be discontinued when their effect turns negative. Similarly,  not knowing what measures have in fact been adjusted is a problem that needs to be addressed. 

  2. Regarding measures reported outside the financial statements, the line between investor relations and accounting is being blurred by companies producing lots of different presentations for different audiences. Some analysts and investors don’t get the full picture of a company because they don’t have access to all of this information in one place – and that’s a problem. Could companies share all this information centrally? Perhaps companies could at least integrate GAAP and non-GAAP numbers into one presentation.

What the CRUF would like to see

The CRUF believes very strongly that there is a clear need for non-GAAP measures. Below we have outlined some clear principles to guide companies on their use:

  • Non-GAAP measures should provide a fair, balanced and understandable view of a company.
  • Companies should provide a clear rationale for the reason why the non-GAAP measure is used. 
  • The measures should be consistent over time and should not be used to support a ‘good news’ narrative and then discontinued when their effect turns negative. Any discontinuations the company deems necessary should be explained.
  • These measures should enhance transparency and always give more, not less, insight into performance of the business.
  • Even when not required by local regulation, companies should prepare a sufficiently detailed reconciliation back to the audited IFRS or US GAAP financial statement number. This is particularly important if the number is not usually adjusted for by a company’s peers.

The way forward

Change may be coming.  In December 2019, the IASB published a consultation document proposing changes to the way IFRS primary financial statements are presented. 

One of the proposals would provide investors with more transparency on companies’ non-GAAP financial measures.  Companies would be required to explain why their ‘management performance measure’ provides useful information, how it was calculated and reconcile it to the most comparable financial statement number. Having consulted informally with a number of investors and analysts in developing these proposals, the IASB believes the approach they are suggesting would help investors more easily find the information they need to analyse company performance.  There are also proposals to present new subtotals in the income statement and give more disaggregation in the notes.

We at the CRUF are pleased to see that the IASB has included proposals for the reporting of some non-GAAP measures in their primary financial statements consultation. We will be working through the proposals to see if we think the IASB has gone far enough to address concerns in this important area of reporting and considering questions such as whether non-GAAP measures should be directly included in the financial statements, therefore making them subject to the external audit process. 

I urge everyone from the investor community to take up the opportunity to feed back to the IASB and make your voice heard.

Robert Morgan, CFA, CPA, CGA is chair of CRUF Canada. He has 25 years of financial analysis experience, and has served on a number of IASB committees, various CFA Institute standard setting committees and is a past Board Member of the Accounting Standards Board of Canada.

Disclaimer: The views expressed in the blog are those of the author(s) and do not necessarily represent the views of all CRUF participants. To read more about the CRUF’s views on this and other topics, please visit the comment letters section of the CRUF website.


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