Some companies report both the GAAP earnings, which they are required to report, and non-GAAP operating earnings, which they are not required to report. GAAP stands for generally accepted accounting principles, which is a framework for accounting established by the Financial Accounting Standards Board.
The GAAP standards are designed to ensure that companies represent their financial standing with uniform rules. This helps to make comparisons between businesses, and it reduces opportunities for businesses to provide misleading information. GAAP requires data and other financial information to be reported in specific, consistent ways. The standards also require businesses to present information that will be pertinent to investors and that will be presented in a format that is clear and understandable.
Operating earnings are one of the non-GAAP earnings measurements that businesses sometimes release to the public to demonstrate their performance. Operating earnings are calculated to show profits after subtracting expenses, such as marketing, administration and operating costs, according to Investopedia. Interest and taxes are two expenses that are not included in the calculation. Even if a business reports operating expenses, it is also required to provide GAAP expenses. Businesses have more accounting flexibility when calculating operating earnings than they do GAAP earnings because there is more leeway for how they classify and calculate revenues and expenses.
Financial Accounting Standards Board
The Financial Accounting Standards Board that sets the standards contained in GAAP is a nongovernmental organization, but it is authorized by the U.S. Securities and Exchange Commission to set these establishing standards. The board is independent of other organizations, including professional and business entities. Its mission is to set accounting standards that encourage consistency, accuracy and helpful to investors and others.
The Securities and Exchange Commission maintains rules for public companies reporting operating earnings and other non-GAAP earnings to ensure that they do not confuse the public. Regulation G, which was adopted because of the 2002 passage of the Sarbanes-Oxley Act, requires that when companies report operating earnings they also must disclose comparable GAAP earnings in the same document. They also must reconcile the differences between the measures.
- Financial Accounting Standards Board: Facts about FASB
- U.S. Securities and Exchange Commission: Conditions for Use of Non-GAAP Measures
- InvestorWords: GAAP
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- U.S. Securities and Exchange Commission. "Cautionary Advice Regarding the Use of "Pro Forma" Financial Information in Earnings Releases," Accessed Aug. 4, 2020.
- IFRS. "CMAC—Call for Members." Accessed Aug. 4, 2020.
- FASB. "For the Investor: The Use of Non-GAAP Metrics," Accessed Aug. 4, 2020.
- McKinsey & Company. "Building a Better Income Statement," Accessed Aug. 4, 2020.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.