Global Rulemakers Seek to Reduce Use of Non-GAAP Measures

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By Steve Burkholder

Dec. 6 — Global accounting rulemakers are about to consider new rules for income statements and performance reporting that could dissuade companies from using measures that stray from generally accepted accounting principles.

International Accounting Standards Board Chairman Hans Hoogervorst said Dec. 6 that the board is preparing to meet on a performance-reporting project. He noted the Securities and Exchange Commission has a current campaign to counter what it sees as an increase in improper non-GAAP reporting.

The topic of non-GAAP measures has become a major issue for securities regulators in the U.S. since last year. What top SEC staff accountants have labeled a “crackdown” on inappropriate non-GAAP measures includes pending efforts by the commission’s Division of Enforcement.

Not Seeking Non-GAAP Ban

“Let me make clear that we do not intend to ban alternative performance measures, because some of them clearly have added value,” Hoogervorst said. “Yet, we share the SEC’s concern that non-GAAP generally paints a rosier picture of a company’s performance than GAAP.”

IASB plans to consider during the week of Dec. 12 the range and direction of a planned performance reporting project, Hoogervorst told Bloomberg BNA after a speech at a conference of the American Institute of CPAs. That would form, along with an effort to improve footnote disclosures, part of the London board’s “better communications” initiative, he said.

“The central part of the better communication theme will be to take a fresh look at the primary financial statements, what we call performance reporting,” Hoogervorst said.

Better Income, Cash Statements

“We will have to provide more and better structure to the income statement and the cash flow statement,” he said. “We will look at additional line-items and possibly sub-totals.”

In the U.S., the Financial Accounting Standards Board also plans to consider in 2017 formally adding an active rule-making project on performance reporting. The U.S. board also has been mulling what it might be able to do to cut non-GAAP reporting proclivities—to close “gaps in GAAP.”

The IASB chairman in his speech tied technological advances in financial reporting marked by use of electronic tagging of accounting information—"big data"—and artificial intelligence to the continued relevance of accounting principles.

Beware of Consistent Flattery

Non-GAAP measures “that consistently flatter a company’s performance are probably not the best basis for sound business decisions,” Hoogervorst said.

Audit and compensation committees also should be concerned about the increasing use of non-GAAP reporting, which is usually devised by a company’s management, Hoogervorst said.

“All involved in managing a company should realize that there is safety in the GAAP numbers,” Hoogervorst said Dec. 6. “They are rigorous and based on sound economic principles. They should serve as an anchor, not just in reporting, but also in management decisions.

“At the end of the day, you manage correctly what you measure correctly.”

To contact the reporter on this story: Steve Burkholder in Washington at sburkholder@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

The text of Hoogervorst’s Dec. 6 speech is available at http://www.ifrs.org/Features/Pages/hans-hoogervorst-speech-safety-in-numbers.aspx.

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