Non‐GAAP Earnings: A Consistency and Comparability Crisis?†

The SEC, FASB, and IASB have expressed interest in the recent proliferation of non-GAAP reporting, raising questions about what this increasing reporting trend means for IFRS- and GAAP-based reporting. Our goal is (1) to inform standard setters and regulators about the current state of non-GAAP reporting and (2) explore how the discretion afforded in non-GAAP reporting influences earnings consistency and comparability, two tenets of IFRS- and GAAP-based earnings. We begin by providing an up-to-date discussion of the most common questions examined in the extant literature to provide insights on what academics have learned to date about non-GAAP reporting. Next, we utilize a novel dataset of detailed non-GAAP disclosures to provide in-depth descriptive evidence on the current state of non-GAAP reporting. We find that the frequency of non-GAAP reporting has increased by 35% in recent years, a trend that we find in every sector. We also provide evidence on how the frequency and magnitude of specific exclusions has changed over time. Of particular interest is the increasing frequency with which firms exclude items that are not commonly excluded by other firms, indicating that more idiosyncratic definitions of non-GAAP earnings are emerging in the marketplace. Finally, we examine how discretion in non-GAAP reporting affects earnings consistency and comparability. We find that the consistency with which firms exclude specific items varies across exclusion types. Importantly, we also find some evidence that inconsistent non-GAAP reporting is associated with lower quality non-GAAP metrics. In examining across-firm comparability, we find descriptive evidence indicating that within-sector performance rankings based on GAAP earnings better explains concurrent stock returns than comparisons based on non-GAAP earnings. However, our preliminary analyses indicate that these differences are not statistically significant.