Comparing Non-GAAP Earnings and ASC 280’s Segment Earnings

We compare non-GAAP earnings and segment earnings determined by ASC 280’s Management Approach, both of which afford managers flexibility in defining performance. This comparison is relevant because (1) standard setters are considering expanding the use of internally viewed information in external reporting, and (2) segment earnings’ flexibility makes it more suitable than GAAP net income for assessing the usefulness of non-GAAP earnings. Using a sample of firms’ non-GAAP earnings and segment earnings from 2003-2018, we examine the items included in and excluded from these measures and assess whether, and why, they are differentially useful for investors. Both earnings measures are more decision-useful than GAAP net income; however, non-GAAP earnings is more useful than segment earnings. Additional analyses, including an experiment, indicate that the internal purpose of the Management Approach yields earnings measures focused on controllability, rather than persistence, which impairs the usefulness of segment earnings for investors.