Title

Non-GAAP Adjustments to Net Income Appearing in the Earnings Releases of the S&P 100: An analysis of Frequency of Occurrence, Materiality and Rationale

Author(s)

Sarah J. Webber, University of DaytonFollow
Nancy B. Nichols, James Madison University
Donna L. Street, University of DaytonFollow
Sandra J. Cereola, James Madison University

Document Type

Article

Publication Date

11-2013

Publication Source

Research in Accounting Regulation

Abstract

For 2005 through 2010, we examine the extent to which S&P 100 companies provide non-GAAP income measures in their annual earnings releases. Our findings provide insight into the evolving nature and magnitude of the adjusting items characteristic of non-GAAP income measures during the post-Reg G period. We find that the number of S&P 100 companies disclosing a non-GAAP income measure increases significantly from 44% to 60% during our period of study.

Based on Gray’s (1980) index of materiality, we find that for each year between 2005 and 2010, the excess of non-GAAP income compared to GAAP income is 18%, 19%, 43%, 61%, 54%, and 45%, respectively. For approximately half of the S&P 100 disclosing non-GAAP income measures, we identify repetitive adjustments for the same item (e.g. restructuring) in multiple years. While none of these companies specifically refer to repetitive adjustments as non-recurring, infrequent or unusual, several include terminology alluding to the use of non-GAAP earnings to evaluate ‘ongoing’ operating trends.

Thus, our findings suggest that a change in tone at the SEC has lead to the reappearance of the disclosure of non-GAAP performance measures that the Commission previously considered to be potentially misleading. In January 2010, the SEC relaxed its position on non-GAAP disclosures clarifying that the recurring item prohibition for SEC filings is based on the description of the item adjusted, not its nature.

Finally, while most of the S&P 100 providing such disclosures indicate why management believes presentation of a non-GAAP financial measure is useful to investors, the rationales are typically general and broad and accordingly not informative.

Inclusive pages

236–251

ISBN/ISSN

1052-0457

Comments

Permission documentation is on file.

Copyright

Copyright © 2013, Elsevier

Publisher

Elsevier

Volume

25

Issue

2

Peer Reviewed

yes

eCommons Citation

Webber, Sarah J.; Nichols, Nancy B.; Street, Donna L.; and Cereola, Sandra J., "Non-GAAP Adjustments to Net Income Appearing in the Earnings Releases of the S&P 100: An analysis of Frequency of Occurrence, Materiality and Rationale" (2013). Accounting Faculty Publications. 54.
https://ecommons.udayton.edu/acc_fac_pub/54