Why do many companies report both GAAP and non-GAAP earnings?

Why do many companies report both GAAP and non-GAAP earnings?

• A. Because non-GAAP earnings exclude non-cash charges such as amortization and stock-based compensation, which can make earnings look higher
• B. GAAP always overstates profits and needs correction
• C. Non-GAAP earnings are always lower than GAAP earnings
• D. GAAP earnings are no longer relevant to investors

Answer: (A)

Companies report both GAAP and non-GAAP earnings to show how the business performs from ongoing operations by removing items that can distort profitability. Non-GAAP figures exclude non-cash or irregular charges, such as amortization of intangible assets and stock-based compensation, which can depress GAAP earnings even though they don’t reflect current cash generation. By presenting these adjustments, management highlights the cash earnings power and makes it easier to compare performance across periods and peers. These figures are supplementary and must be reconciled to GAAP numbers, since they depend on what management decides to exclude and can be subject to bias. So, the best reason is that non-GAAP earnings exclude non-cash charges such as amortization and stock-based compensation, which can make earnings look higher.

Companies report both GAAP and non-GAAP earnings to show how the business performs from ongoing operations by removing items that can distort profitability. Non-GAAP figures exclude non-cash or irregular charges, such as amortization of intangible assets and stock-based compensation, which can depress GAAP earnings even though they don’t reflect current cash generation. By presenting these adjustments, management highlights the cash earnings power and makes it easier to compare performance across periods and peers. These figures are supplementary and must be reconciled to GAAP numbers, since they depend on what management decides to exclude and can be subject to bias.

So, the best reason is that non-GAAP earnings exclude non-cash charges such as amortization and stock-based compensation, which can make earnings look higher.