Getting the non-GAAP message
It didn’t take long. It started with a rather casual comment of concern by SEC Chair Mary Jo White and was quickly followed by the issuance of new SEC guidelines last May. The result: Public companies are rapidly changing their financial reporting – moving away from non-GAAP performance measures.
“We feel like we have seen improvements, just in the second quarter earnings releases,” with regard to public companies not giving prominence to non-GAAP measures in financial reporting, the commission’s Jenifer Minke-Girard told the main advisory council of the Financial Accounting Standards Board last month, according to Bloomberg BNA.
Before the SEC staff issued the guidance in May, about one-half of Fortune 500 companies had “prominence issues,” according to Minke-Girard, an assistant deputy chief accountant in the SEC’s Office of Chief Accountant. After the guidance was released, she cited recent findings that suggested that those non-GAAP problems had dropped to about 20 percent.
Although companies are allowed to use non-GAAP metrics along with GAAP metrics, they must give equal prominence to each and explain how they are reconciled. The SEC has signaled that they are being especially vigilant about public companies’ use of non-standardized, tailor-made measures that often are showcased in quarterly earnings reports.
Many companies like using non-GAAP measures, contending that it gives a more accurate picture of company financials. “Non-GAAP gets a bad rap,” Marie Gallagher, senior vice president and controller at PepsiCo, Inc. told Bloomberg. “But if done well, consistently, transparently, using good governance, it’s really the best way to tell the company’s story to the investors and analysts and the users of financial statements.”
Utilizing non-GAAP measures may be even more important for smaller microcap companies, according to Weinberg Managing Partner Corey Fischer. “Microcap companies live and struggle in a very different world. Their investors are accustomed to seeing non-GAAP measures to highlight noncash charges that may dramatically affect earnings,” he said.
“It’s important that companies comply with the new guidelines and it is equally important that companies clearly explain any changes they are making to their reporting measures,” he added.
Ready for new Revenue Recognition Standard?
It took 10 years for the Financial Accounting Standards Board (FASB) and its international counterpart, the International Accounting Standards Board (IASB), to jointly write the new Revenue Recognition Standard that will significantly impact such commercial sectors as telecommunications, computer software, media and entertainment, and biotechnology and life sciences.
In his comments at a September joint FASB/IASB webcast, FASB Vice Chairman James Kroeker expressed surprise by the high percentage of companies that have not begun to adopt the new standard that has a 2018 effective date.
It took them ten years to develop, and he’s surprised that companies haven’t instantly snapped to attention? Perhaps companies are just a little busy now struggling to comply with new reporting rules on asset management, CEO pay ratios, conflict minerals, and other government imposed inconveniences, not to mention the new lease accounting standard.
When the webcast audience was surveyed about how much progress they had made in implementing the new Revenue Recognition Standard, 24% said that they haven’t yet started the process, and only about 25% said that they had just recently started implementation, according to polling results provided to Bloomberg BNA by FASB.
Although top-line revenue might not change much for some industries, there may be many other industries affected by some of the nuances of the new standard, especially if licenses or long term contracts are involved. As such, many companies may have to retool their information technology divisions to meet the requirements of the new standard.
The just released 10th Annual Main Street Investor Survey, conducted by the Center for Audit Quality (CAQ), has some positive news:
* 79% of investors express confidence in U.S. capital markets.
* 81% of investors have confidence in investing in U.S. publicly traded companies, an all-time survey high.
* Three-quarters of investors say they are confident in audited financial information released by publicly held companies.
* Investors appreciate the key players in the financial system, showing high degrees of confidence in external auditors, independent audit committees, and stock exchanges.
Each year, the Main Street Investor Survey measures retail investor confidence in U.S. capital markets, global capital markets, and audited financial information, as well as confidence in investing in publicly traded companies.