Financial terminology explained: key finance terms - GAAP vs non-GAAP

What are non-GAAP metrics? What are definitions, examples and concerns regarding non-GAAP financial measures? Learn the difference between GAAP and non-GAAP in this video! ⏱️TIMESTAMPS⏱️ 00:00 Introduction 01:02 What is GAAP? What is non-GAAP? 03:13 What are "common" non-GAAP metrics? 05:43 What are the concerns about non-GAAP reporting? 08:09 Which guidance on GAAP/non-GAAP have regulators (SEC, FASB, IASB) provided? We walk through the context of GAAP and non-GAAP metrics in this video, and discuss Verizon (NYSE: VZ) non-GAAP measurements and Valeant (NYSE: VRX) non-GAAP metrics. GAAP means Generally Accepted Accounting Principles. Using GAAP provides uniformity in how companies report their financial performance. Having accounting standards like US GAAP and IFRS enables you to compare the performance of companies within and across economic sectors, so the standards are necessarily generic in nature. GAAP numbers should be neutral, comparable and verifiable, and provide information that markets can trust. Non-GAAP metrics are alternative definitions of (in most cases) profitability, that are supposed to enrich the financial information that investors receive about a company’s performance. In other words, free-of-charge additional information to provide insights into the company. Many companies will include a footnote that states that “non-GAAP metrics are useful to investors in their assessment of our operating performance and the valuation of our company”. How does one spot a non-GAAP metric? Well, the words “adjusted” and “excluding” often give it away: adjusted Gross Profit, adjusted EBITDA, adjusted Net Earnings, adjusted Earnings Per Share, Operating Profit excluding special items, Net Income excluding non-recurring items, and on and on and on. By the way, some companies don’t call non-GAAP information “non-GAAP”, but speak of core profitability, normalized profitability, underlying profitability, or “pro forma” measures. Let’s remember the overarching principle of financial reporting: financial statements should be a “fair and accurate representation” of the company’s financial position, results of operations and cash flows. For both GAAP and non-GAAP information, another key principle is that information cannot be misleading. For a review of the similarities and differences between US GAAP and IFRS, please watch this related video: https://www.youtube.com/watch?v=7B96MhOGaqE Please subscribe to the Finance Storyteller YouTube channel. More videos coming soon! More information on the SEC guidance on non-GAAP measures available at: https://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm Philip de Vroe (The Finance Storyteller) aims to make strategy, finance and leadership enjoyable and easier to understand. Learn the business vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better stock market investment decisions. Philip delivers training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!