What does GAAP stand for?

GAAP stands for Generally Accepted Accounting Principles, the standardized set of accounting rules and conventions used in the United States, maintained by the Financial Accounting Standards Board.

What is non-GAAP earnings?

Non-GAAP earnings, sometimes called adjusted or pro forma earnings, are a company’s own alternative profit figure that excludes certain items management believes distort the picture of core operating performance.

Why do companies report non-GAAP figures at all?

Companies argue that certain costs — such as one-time restructuring charges or non-cash stock compensation — obscure the underlying trend in the business, so they present an adjusted figure to highlight what they consider ongoing operational performance.

What items are commonly excluded in non-GAAP earnings?

Frequent exclusions include stock-based compensation expense, restructuring and severance costs, impairment charges, merger and acquisition costs, and gains or losses from asset sales.

Is it legal for companies to report non-GAAP figures?

Yes, but regulators such as the SEC require companies to present the comparable GAAP figure with equal or greater prominence and to reconcile the non-GAAP figure back to it, to prevent misleading disclosures.

Which figure should investors trust more, GAAP or non-GAAP?

Neither should be trusted blindly — GAAP offers consistency and comparability, while non-GAAP can offer useful insight into recurring operations, but only when the adjustments are reasonable and reviewed critically rather than accepted at face value.

Can non-GAAP adjustments be misleading?

Yes, particularly when companies repeatedly label genuinely recurring costs as "one-time" items quarter after quarter, which can flatter adjusted earnings while understating real, ongoing expenses.

How do stock-based compensation adjustments affect non-GAAP earnings?

Excluding stock-based compensation, a very common non-GAAP adjustment, raises reported adjusted profit even though this compensation represents a real economic cost that dilutes existing shareholders over time.

How can I compare GAAP and non-GAAP figures myself?

Earnings releases typically include a reconciliation table showing the specific adjustments made to move from the GAAP figure to the non-GAAP figure, which is worth reviewing line by line rather than skipping.

Does every country use GAAP?

GAAP is primarily a U.S. accounting standard; many other countries use International Financial Reporting Standards (IFRS), which share similar goals of standardization but differ in specific rules.

GAAP vs Non-GAAP Earnings: What's the Difference

Companies often report two different earnings figures for the same quarter — and the gap between them can be meaningful, not just a rounding difference.

The Distinction

GAAP (Generally Accepted Accounting Principles) earnings follow standardized rules the SEC requires — a consistent basis for comparing companies. Non-GAAP (adjusted) earnings exclude specific items management deems non-recurring or non-operational — stock-based compensation, restructuring charges, one-time legal settlements, acquisition costs. Companies must reconcile the two in every disclosure, but non-GAAP figures are frequently the ones emphasized in press release headlines, since they're often the higher and more flattering number.

One thing worth checking: Watch specifically for stock-based compensation being excluded from non-GAAP figures — it's a genuine expense (diluting existing shareholders even though it isn't a cash outlay), and a company consistently excluding a large, persistent stock-based compensation charge from its "adjusted" earnings is presenting a meaningfully rosier picture than GAAP reflects.

Someone Comparing a Company's Adjusted vs. GAAP Earnings: Check specifically what's being excluded — stock-based compensation is a common and meaningful adjustment worth scrutinizing.

Someone Comparing Companies Across an Industry: Use GAAP figures for the most consistent, standardized basis of comparison.

Read GAAP and Non-GAAP the Way

Check the reconciliation between GAAP and non-GAAP figures every quarter.
Watch for stock-based compensation being excluded from adjusted numbers.
Use GAAP for cross-company comparisons given its standardization.

See revenue vs. earnings explained for the underlying figures these adjustments apply to.

GAAP vs Non-GAAP Earnings: What's the Difference

The Distinction

Read GAAP and Non-GAAP the Way

Comments

More in Earnings

Trending Now

The Distinction

Read GAAP and Non-GAAP the Way

Sources & References

Comments

More in Earnings

Trending Now