Non-GAAP Reporting in Conceptual Framework of Financial Reporting
Instructions: 1. Non-GAAP Reporting in Conceptual Framework of Financial Reporting .
2.Given the objective of financial reporting, discuss how non-GAAP reporting supports or detracts from this objective
3.Considering qualitative characteristics and enhancing characteristics for financial information, consider how non-GAAP reporting contributes or detracts from the characteristics that support high quality financial reporting.
4.The quality of written communication (This will be assessed for clarity, presentation, grammar, spelling, sentence structure and correct referencing using Chicago style) (40%).
Non-GAAP Reporting in Conceptual Framework of Financial Reporting
Introduction
Most large companies usually focus on non-GAAP financial measures in the discussion of management and analysis, incomes, releases and other communications to give insight into the business. Improving the transparency of financial measures of non-GAAP can assist users to understand better of the past performance of the company and anticipate future performance. Compared to GAAP, non-GAAP has better performance. According to a report given, “data show that the spread between GAAP earnings per share and non-GAAP earnings per share has widened significantly for industrial companies in just a few years. No-nGAAP earning per share was higher than GAAP by an average of 25% in 2015, compared with just 6% in 2013” (Sidibe & Nana 2016, p 2). Though the financial measures of non-GAAP get commonly used, their comparability differs from one company to another. Nuance Communication inc Company of US and Albano Healthcare Association Company in Australia are some of the enterprises that use the non-GAAP reporting as discussed below.
What is Non-GAAP Financial Reporting?
Non-GAAP reporting is a method that is alternatively used to measure the reports of a company and earnings of non-GAAP of a company as calculated via generally accepted accounting principles (GAAP). The alternative figures give measurements that are more accurate of the financial performance of the enterprise. According to Nuance Company of communication of US, non-GAAP reporting gets calculated by comparing the current revenue to previous years’. They regard applying of non-GAAP reporting per share useful in evaluating the act of the continuing company operation. According to the report given by Nuance Company of Us, the revenue achieved of the non-GAAP in the past year was approximately 2%. In 2016 the first quarter the total recurring income was $332.5 million representing 67% of the total revenue of non-GAAP in contrast to 321.7 million which was 66% a year ago (Burlington & Mass 2016, p 5-10). In the Abano Healthcare of Australia also uses the non-GAAP reporting by calculating through the utilization of the current period for entities reporting in currencies other than the money of Australia. In 2015 the earning reported in the company was 60% more than the previous year (Albano Healthcare 2015, p 12-30). The management of the companies uses this tool of Non-GAAP financial measure so as to improve their comprehension of part of fiscal performance and also establish the compensation of the Directorate. Non-GAAP financial measures also helps in understanding business performance by excluding the acquisition accounting effect on deferred income acquired and other acquisitions.
How non-GAAP supports or detracts from objectives of financial reporting
Just like financial reporting, non-GAAP provides useful information in making investment and credit decision. They provide insight information into the financial performance of an issuer and also flexibility in communicating useful information on the particular entity of investment. Non-GAAP helps investors in reducing the risks of misleading disclosure and helps them in making a decision and exposing them to more useful information (Weißenberger, Barbara & Hendrik 2011, p 160-180). The problem can arise when the financial dealings are accessible incompatibly, inadequately or when the results of financial get dogged by GAAP.
Non-GAAP gives useful information in assessing the prospects of cash flow by helping the potential investors and creditors to evaluate the amounts, timing and uncertainty of the inflow of capital and outflow in the future. The information is usually helpful since it generates net cash inflows thus giving returns to investors and creditors.
Non-GAAP provides information about resources of an entity by making various changes and claims to those resources. It looks at their whole financial package report so as to be able to communicate the device to investors. They can provide information on economic resources of its assets and claim to such remedies of liabilities and equity (Chen, Feng, Ole-Kristian, Qingyuan, & Xin 2011, p 1255-1288). Transactions effects and other events that can change resources and claims to them should get looked at.
How non-GAAP reporting contributes or detracts from qualitative features of financial reporting
Non-GAAP contributes to relevance by being helpful in making investment, credit and also the allocation of the decision of similar resources. Information that is relevant in the non-GAAP makes a difference in the user’s decision by helping them evaluate the effects potential of past, present or transactions of future or on the flow of cash or confirming and correcting previous evaluations.
Non-GAAP reporting gives a faithful presentation in the phenomena of economic in real-world that it purports to represent without material error or bias. The information presented is verifiable, neutral and complete. In being verifiable, the information must not be an estimate of a single point, in neutral, there is the absence of bias that can achieve predetermined result while completeness is including all information that will bring faithfulness in the phenomena of economics (Isidro, Helena, & Ana 2015, p95-128).
Non-GAAP contributes to comparability and consistency that enhances its usefulness in making investment and credit. Flexibility is helpful in knowing how measures get calculated by having a policy. Non-GAAP eliminates the effect of an item that can reduce earnings in one phase and not remove a related item in another time when revenues get increased.
Non-GAAP contributes to the characteristic of understandability by enabling a user who has knowledge that is reasonable about activities of business and economical to understand its meaning. Non-GAAP ensures that information that is relevant should not get solely excluded since it may be too complicated for some user to comprehend
. It enhances understandability by providing information is classified and presented clearly in a concise manner.
Conclusion
There are distinct ways that a company can take so as to increase its usefulness through non-GAAP earning. If every company considers non-GAAP metrics through transparency and giving investors an accurate picture of performance, then good and higher results are expected. The non-GAAP financial measure is helpful in the company by analyzing and evaluating the business performance and when planning for future periods.
Reference
Albana Health care. “Albano health care group interim financial statement for the sixth months through reconcialation of non-GAAP financial measures.” (2015 pp 10-30
Burlington, Mass. “Nuance Announces First quarter 2016 results: Reports strong non-GAAP revenue, non-GAAP EPS, and cash flow.” Report on Nuance Company 24 (2016) p 5-10.
Black, Dirk E., Ervin L. Black, Theodore E. Christensen, and Kurt H. Gee. “CEO compensation incentives and non-GAAP earnings disclosures.” (2015).
Chen, Feng, Ole-Kristian Hope, Qingyuan Li, and Xin Wang. “Financial reporting quality and investment efficiency of private firms in emerging markets.” The accounting review 86, no. 4 (2011): 1255-1288.
Isidro, Helena, and Ana Marques. “The role of institutional and economic factors in the strategic use of non-GAAP disclosures to beat earnings benchmarks.” European Accounting Review 24, no. 1 (2015): 95-128.
Kolev, Kalin, Carol A. Marquardt, and Sarah E. McVay. “SEC scrutiny and the evolution of non-GAAP reporting.” The Accounting Review 83, no. 1 (2008): 157-184.
Malone, Lance, Ann Tarca, and Marvin Wee. “IFRS non‐GAAP earnings disclosures and fair value measurement.” Accounting & Finance 56, no. 1 (2016): 59-97.
Sidibe & Nana. Why Non-GAAP Measures can prove Useful.” Accounting & Reporting no.1 (2016).
Weißenberger, Barbara E., and Hendrik Angelkort. “Integration of financial and management accounting systems: The mediating influence of a consistent financial language on controllership effectiveness.” Management Accounting Research 22, no. 3 (2011): 160-180.