What Is GAAP & Non-GAAP?

What Is GAAP & Non-GAAP?
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Companies that list shares in the public stock market disclose earnings, which is a measure of profitability, on a quarterly and yearly basis. Earnings can be delivered by taking into account different components, but Generally Accepted Accounting Principles must be included in the way profits are presented to the government. In short, GAAP earnings are accounting rules companies must follow, and non-GAAP results are adjusted earnings that companies have the option to include.


Companies that issue stock in the public markets are governed by a regulatory agency in a region, such as the Securities and Exchange Commission in the U.S. When profits are reported, companies must adhere to a common style known as GAAP earnings so that there are certain commonalities in results. Companies may also include an adjusted measure of earnings that exclude certain non-recurring items. These are known as non-GAAP results and this method allows companies greater flexibility in reporting earnings.


When a company decides to include non-GAAP in addition to GAAP results in an earnings report, there must be some type of disclaimer or fine print to alert investors about the adjustment. Litigation costs are one example that a company may decide to leave out in non-GAAP results since those expenses are not ongoing. Non-GAAP results may be referred to in different ways, including pro-forma earnings and as-adjusted earnings, according to The Motley Fool.


According to Bloomberg, technology companies are increasingly making the shift toward focusing on GAAP results. In 2011, Apple and other technology bellwethers were not excluding discretionary expense items from profit results, according to the article. The trend was in stark contrast to the way technology companies reported earnings 2000 when the Internet bubble burst. During that period, technology companies were notorious for abusing the non-GAAP latitude and including recurring charges into adjusted earnings results.


Non-GAAP earnings may not tell the entire profit picture at a company. Although a company is not required to report non-recurring items for expenses there is a way to even further amplify profits. According to The Motley Fool, one-time profits can be included in a company's earnings results. In 2011, Salesforce.com did just that when it included a one-time tax credit in its earnings results as a result of clever accounting, the article reports.