Disclosure of Street Earnings

Document Type : Review Paper

Author

Accounting Ph. D / Allameh Tabatabai'i University

Abstract

some roots in difficulties which GAAP imposes on preparing and disclosing financial information. Investigation of probable incentives of disclosing such information among managers, and then, observation of accounting and auditing standard setters' and also regulators' reactions to this phenomenon, extends discussions in studying accounting policies area. Furthermore, reviewing experimental researches which have examined the effect of Non-GAAP Earnings disclosure on judgements of investors and financial analysts, illustrates the behavioral effects of this new and different kind of voluntary disclosure. This study shows that managers' incentives of disclosing "Non-GAAP Earnings" and in general, "Non-GAAP financial performance metrics" could be variable from misleading users to communicating more effectively with them. Additionally, by deliberating viewpoints and reactions of accounting and auditing standard setters, it has been revealed that accepting disclosure of such metrics as a "Symptom" of need for filling the existing vacuums in accounting and auditing standards, is based on the standard setters' self-Interest.

Keywords

References

Bentley, J. W., Christensen, T. E., Gee, K. H., & Whipple, B. C. (2018). Disentangling managers’ and analysts’ non‐GAAP reporting. Journal of Accounting Research, 56(4), 1039-1081.
Bhattacharya, N., Black, E. L., Christensen, T. E., & Larson, C. R. (2003). Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36(1-3), 285-319.
Black, D. E., Black, E. L., Christensen, T. E., & Heninger, W. G. (2012). Has the regulation of pro forma reporting in the US changed investors’ perceptions of pro forma earnings disclosures?. Journal of Business Finance & Accounting, 39(7‐8), 876-904.
Black, D. E., & Christensen, T. E. (2009). US managers' use of ‘pro forma’adjustments to meet strategic earnings targets. Journal of Business Finance & Accounting, 36(3‐4), 297-326.
Black, D. E., Christensen, T. E., Ciesielski, J. T., & Whipple, B. C. (2018). Non‐GAAP reporting: Evidence from academia and current practice. Journal of Business Finance & Accounting, 45(3-4), 259-294.
Black, E. L., Christensen, T. E., Kiosse, P. V., & Steffen, T. D. (2017). Has the regulation of non-GAAP disclosures influenced managers’ use of aggressive earnings exclusions?. Journal of Accounting, Auditing & Finance, 32(2), 209-240.
Bond, D., Czernkowski, R., Lee, Y. S., & Loyeung, A. (2017). Market reaction to non-GAAP earnings around SEC regulation. Journal of Contemporary Accounting & Economics, 13(3), 193-208.
Bowen, R. M., Davis, A. K., & Matsumoto, D. A. (2005). Emphasis on pro forma versus GAAP earnings in quarterly press releases: Determinants, SEC intervention, and market reactions. The Accounting Review, 80(4), 1011-1038.
Bradshaw, M. T., & Sloan, R. G. (2002). GAAP versus the street: An empirical assessment of two alternative definitions of earnings. Journal of Accounting Research, 40(1), 41-66.
Brown, L. D., & Sivakumar, K. (2003). Comparing the value relevance of two operating income measures. Review of Accounting Studies, 8(4), 561-572.
Chen, C. Y. (2010). Do analysts and investors fully understand the persistence of the items excluded from Street earnings?. Review of Accounting Studies, 15(1), 32-69.
Chen, H., Lee, Y., & Lo, S. (2017). The Information Quality of Non-GAAP Disclosures. Working Paper.
Curtis, A. B., McVay, S. E., & Whipple, B. C. (2014). The disclosure of non-GAAP earnings information in the presence of transitory gains. The Accounting Review, 89(3), 933-958.
Dilla, W. N., Janvrin, D. J., & Jeffrey, C. (2010). The impact of graphical displays of pro forma earnings information on professional and nonprofessional investors' earnings judgments. Behavioral Research in Accounting, Forthcoming.
Jones, D. (2001). Company Inc.(2001),‘SEC Probes 4 Firms for Possible Abuses of Pro-Forma Results’. Dow Jones Newswires.
Elliott, W. B. (2006). Are investors influenced by pro forma emphasis and reconciliations in earnings announcements?. The Accounting Review, 81(1), 113-133.
Entwistle, G. M., Feltham, G. D., & Mbagwu, C. (2006). Financial reporting regulation and the reporting of pro forma earnings. Accounting Horizons, 20(1), 39-55.
Frederickson, J. R., & Miller, J. S. (2004). The effects of pro forma earnings disclosures on analysts' and nonprofessional investors' equity valuation judgments. The Accounting Review, 79(3), 667-686.
Golden, R. (2017). Why the FASB cares about non-GAAP performance measures. FASB Outlook: From the Chairman’s Desk Q, 1, 2017.
Gomez, E., Heflin, F., & Wang, J. (2018). Information environment consequences of SEC non-GAAP comment letters. Available at SSRN 3044026.
Hallman, N., Schmidt, J., & Thompson, A. (2017). Does Company Reporting of Non-GAAP Earnings Result in Less Conservative Auditor Materiality Judgments? Evidence from the UK. Working paper.
Heflin, F., & Hsu, C. (2008). The impact of the SEC's regulation of non-GAAP disclosures. Journal of Accounting and Economics, 46(2-3), 349-365.
Hogan, B. R., Krishnamoorthy, G., & Maroney, J. J. (2017). Pro forma earnings presentation effects and investment decisions. Behavioral Research in Accounting, 29(2), 11-24.
Hoogervorst, H. (2015). mind the Gap (Between non-GAAP and GAAP). March, 31, 2015.
Jennings, R., & Marques, A. (2011). The joint effects of corporate governance and regulation on the disclosure of manager‐adjusted non‐GAAP earnings in the US. Journal of Business Finance & Accounting, 38(3‐4), 364-394.
Kolev, K., Marquardt, C. A., & McVay, S. E. (2008). SEC scrutiny and the evolution of non‐GAAP reporting. The Accounting Review, 83(1), 157-184.
Kyung, H., & Weintrop, J. (2013, October). The Economic Consequences of SEC Interpretive Guidance and the Effects on Firm Behavior: Evidence of Non-GAAP Earnings Disclosure. In CAAA Annual Conference.
Leone, M. (2010). What’s on the SEC’s radar. CFO. com.
Linsmeier, T. J. (2016). Revised model for presentation in statement (s) of financial performance: Potential implications for measurement in the conceptual framework. Accounting Horizons, 30(4), 485-498.
Lougee, B. A., & Marquardt, C. A. (2004). Earnings informativeness and strategic disclosure: An empirical examination of “pro forma” earnings. The Accounting Review, 79(3), 769-795.
Marques, A. (2006). SEC interventions and the frequency and usefulness of non-GAAP financial measures. Review of Accounting Studies, 11(4), 549-574.
Nichols, N. B., Gray, S. J., & Street, D. L. (2005). Pro Forma adjustments to GAAP earnings: Bias, materiality, and SEC action. Research in Accounting Regulation, 18, 29-52.
Rapoport, M. (2013). SEC task force probes use of non-GAAP metrics: hot technology IPOs have brought more focus to accounting issues. Wall Street Journal.
Securities and Exchange Commission (SEC) (2001). SEC Cautions Companies, Alerts Investors to Potential Dangers of “Pro Forma” Financials. Press Release 2001-144’, December 4, 2001.
Shumsky, T. (2016). IASB chair rings alarm over use of non-GAAP measures. The Wall Street Journal online.
Siegel, M. (2014). For the investor: The use of non-GAAP metrics. FASB Outlook Q, 4.
Wang, G. (2014). The presentation arrangements of pro forma earnings disclosures: Managerial incentives and market responses. Accounting and Finance Research (2014).
Whipple, B. C. (2015). The great unknown: Why exclude “other” items from non-GAAP earnings calculations in the post-reg G world?. Available at SSRN 2480663.
Young, S. (2014). The drivers, consequences and policy implications of non-GAAP earnings reporting. Accounting and Business Research, 44(4), 444-465.
Zhang, H., & Zheng, L. (2011). The valuation impact of reconciling pro forma earnings to GAAP earnings. Journal of Accounting and Economics, 51(1-2), 186-202
Journal of Accounting and Social Interests
Volume 10, Issue 2 - Serial Number 37
September 2020
Pages 47-61

Files

History

  • Receive Date: 16 November 2018
  • Revise Date: 26 March 2020
  • Accept Date: 18 March 2019

Share

How to cite

Statistics