GAAP vs non-GAAP

hello everyone, I'm fairly new to investing.

My question is with regards to GAAP (general accepted account standards) and non-GAAP. I don't really understand why Non-GAAP exist or how it is useful. If a company has said it is profitable on a non GAAP basis and not profitable on GAAP basis, which one should I use as a reference? should I just ignore the non GAAP?

Thanks

Comments

  • Hi massive02,

    GAAP is a system for using accrual accounting, many small businesses may use cash accounting which can strew financial information between fiscal periods.

    Generally accepted accounting principles have been around for a while. I'm in Canada and we have our own GAAP which is fairly similar to US GAAP. There is a shift in Canada and the international community to switch to the new IFRS (international financial reporting standards.) US seems more set in their ways against the switch. I believe if a company is listed as a public company in the US they are required to use GAAP or list the differences. Any private company can really use any rules they want within reason. The IRS would have their own requirements for filing taxes so this leads to differences in capital assets current value, depreciation, revenue recognition and future tax assets/liabilities based on the differences.

    That is why many newer markets are harder to value as they may be less stringent in following any GAAP or IFRS.

    With GAAP and the new IFRS the main difference is recording assets at book vs fair market value. In IFRS you are supposed to record a non material gain or loss every year based on any changes to the asset value. This means assets on the balance sheet more clearly reflect their current value however it does change the income without any realization of the that in liquidity. There are other differences as well. This is why with GAAP you may be able to find some hidden value of assets that have been held for so long by a company. An example would be the land value of Sears which has been operating so long.

    You can read all about the GAAP or US GAAP online. The 10K and 10Q reports of the companies should disclose the differences that a company uses. A company does not need to follow GAAP if it materially misrepresents the financials based on specific industries or scenarios.

    I hope this gives you some idea.

    Cheers


  • so I should just ignore non gaap? and only pay attention to gaap?
  • I have some trust shares of a reit in my wifes portfolio made of triple net industrial leases and I believe that it really depends on the business in their case stating fair value of the properties. Just read the notes in the reports and they will tell you why they do or do not use GAAP measures. As a rule most US listed companies generally follow GAAP. I would not get too hung up about it. This may be less true for overseas companies listed on US exchanges. To be honest I dont spend a lot of time looking at the income statement, I usually take a quick glance before moving on to the balance sheet and the statement of cash flow. It would come through on the income statement and also come through on the balance sheet where you might need to be careful however if you use something like the statement of cash flow it will cut through a lot of that noise. If you look at things like operating income or EBITDA it will avoid some of these interpretations by management of GAAP or non GAAP measures for you. I guess that is why Toby Carlisle likes this sort of thing for his acquirers multiple.
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