Implications Of Non-GAAP Earnings On Financial Performance And Future Of Business Organizations

Use of non-GAAP earnings method in current context

Discuss about the Organizations in Statistics Business Research Method.

Non-GAAP earnings method is a way to measure the earnings of the business organizations. In case of non-GAAP earnings, the earnings of the organizations are calculated over the GAAP earnings (Bentley et al. 2016). The non-GAAP earnings method is based on the logic management. The GAAP earnings of the business organizations can be supplemented by the non-GAAP earnings. Brown et al. (2016) mentioned that the non-GAAP earnings method provides better results than the GAAP earnings method. The non-GAAP earnings are more accurate that the GAAP earnings. Moreover, the non-GAAP earnings are more helpful for the investors (Black et al. 2015). However, with the help of this study, it will be tried to identify the implications of non-GAAP earnings on the financial performance and the future of the business organizations. At the same time, the research will also try to identify how much the use of non-GAAP accounting measures is beneficial for the investors. In order to achieve the goal, the research will analyze several existing researches on the similar subject matter and an in-depth literature review will be done for better understanding on the subject.

In current business context, if the financial statements of different companies are analyzed, then it can be identified that the companies have used some methods of earnings measurement, which are different than the method prescribed by Generally Accepted Accounting Standard or GAAP (Isidro and Marques 2015). This earnings measurement method is known as the non-GAAP earnings measurement method. Malone, Tarca and Wee (2016) stated that the use of non-GAAP earnings measurement method is increasing day-by-day because it helps to get better outcomes to the companies and investors. Black et al. (2015) added that in case of USA, most of the companies in recent era are using the non-GAAP earnings method for measuring their earnings in a particular financial year.

On the other side, Cormier, Magnan and Demaria (2016) argued that in present business context, many business organizations are using the non GAAP earnings measures along with the GAAP earnings measures. This technique of earning measurement has better impact on the financial performance of the company. The computation of earnings of the company by using the mixed method of GAAP earnings and non-GAAP earnings is more informative (Misund, and Osmundsen 2015).

As per the current report on the use of accounting techniques, it has been identified that the use of non-GAAP earnings measurement method has increased from 358 in 2009 to 448 in 2015 in case of S&P 500 companies. In case of the other companies, the number has grown from 280 to 407 (Linsmeier 2016). The number of companies in FTSE 100, which are using the non-GAAP earnings measures, has also increased. The different metrics, which are included under non-GAAP accounting measures are – adjusted revenue, EBITDA, adjusted EBITED, EBIT, Adjusted net revenue, Funds for operations, Adjusted EPS, Average revenue per customers and free cash flow (Cheng 2016).

Reasons for which the companies are using the non-GAAP accounting measures

If the statistics of FTSE 100 companies are checked then it can be identified that in current scenario, the use of non-GAAP accounting measures has been increased by 39% in computing and reporting adjusted operating profit, 11% increased in ascertaining the EBITDA (Leung and Veenman 2016). On the other side, Demerjian, Donovan and Larson (2016) mentioned that in current scenario, only 2% companies are there in United Kingdom, which are using the GAAP measurement methods purely. This indicates that 98% of the companies in United Kingdom are using non-GAAP measurement technique while calculating their incomes either directly or indirectly (Mergenthaler 2015). However, Misund and Osmundsen (2015) stated that it is not easy to ascertain the actual percentage of companies, which are using only the non-GAAP accounting measures.

As per PWC’s report, the companies in today’s scenario have agreed that the non-GAAP accounting standards provide some additional information to the stakeholders, which is not available in case of GAAP accounting measures. This additional information is very useful for the users of financial information of the companies. Bricker and Siegel (2016) noted that the main reasons for which the business organizations prefer to use the non-GAAP accounting measures is the availability of information.

In support of this Black et al. (2015) added that the main aim of financial reporting is to provide required information to the stakeholders or the users so that they can take better decisions and in case of non-GAAP accounting measures, it is easily possible. It actually helps the stakeholders to understand the present performance and future possibilities of the company. At the same time, Misund and Osmundsen (2015) mentioned that, if the business organizations use the non-GAAP accounting measures, then it becomes easier for them to maintain the disclosure requirements. This means the non-GAAP accounting measures help to maintain the transparency level in the business organizations.

Brown et al. (2016) believed that the use of non-GAAP accounting measures is very helpful for the investors because it helps to analyze the financial statements in a better way. If the use of non-GAAP accounting measures are analyzed then the following advantages can be derived:

Non-GAAP accounting measures have no tendency to understate the accounting figures like, Earnings Per Share or EPS and EBITDA. Due to this, the actual income of the companies can be identified and the investors can take proper decisions as per the financial results stated in the financial statements of the companies (Mergenthaler 2015).

Advantages of non-GAAP accounting measures

In non-GAAP accounting measures, more financial information of the companies can be gained. The non-GAAP accounting measures provide detailed information about the financial activities and transactions of the companies, which is very helpful for the stakeholders of the companies (Linsmeier 2016).

As the non-GAAP accounting measures provide the detailed views of the financial positions of the companies, the chances of misleading the statements are much less than that of the GAAP accounting measures. Hence, the chances of accounting frauds are limited in case of non-GAAP accounting measures (Leung and Veenman 2016).

The non-GAAP accounting measures are more transparent than that of the accounting measures under GAAP.

Therefore, from the above discussions, it can be said that there are many advantages that can be obtained by using the non-GAAP accounting measures. Due to these advantages, the use of this particular method has increased n recent era.

The primary objectives of this particular research will be as follows:

• To identify the benefits that the business organizations and investors can get by using the non-GAAP accounting standards
• To determine the relationship between the financial results of the companies and the non-GAAP accounting measures used by the companies
• To find out the challenges that the companies and investors face in using the non-GAAP accounting measures
• To identify the ways through which the challenges in non-GAAP accounting measures can be solved

The questions that will be answered during this research are as follows:

• What benefits that the business organizations get by using the non-GAAP accounting measures?
• What is the relationship between the non-GAAP accounting measures and financial performance of the companies?
• What are the problems faced by the companies and investors in using non-GAAP accounting measures?
• How the organizations can solve the problem areas in non-GAAP accounting measures?

The hypotheses of this research will be as follows:

H1: The mixed method of GAAP and non-GAAP accounting measurement helps the investors to analyze the financial statements in better way.

H2: The mixed method of GAAP and non-GAAP accounting measurement does not help the investors in analyzing the financial reports.

Research methodology is the systematic way through which a research is carried on. In this particular research, the research methodology will be based on particular philosophy, approach and design of research. For a research project, there are mainly three research philosophies are available and these are – positivism philosophy, realism philosophy and interpretivism philosophy (Silverman 2016). Positivism philosophy is based on the positivist or logical knowledge. This particular philosophy especially focuses on the facts and logic. On the other side, realism philosophy is based on the different aspects of reality like, beliefs, linguistic practices and perceptions. The interpretivism philosophy is based on social science (Mackey and Gass 2015). However, this research project will be based on positivism philosophy because this philosophy is easy to understand and it has well-defined structure that allows analyzing the data systematically.

Research approach is as important as the research philosophy. There are two types of research approaches – deductive research approach and inductive research approach (Flick 2015). In case of deductive approach, the research is done through testing the existing theories but in case of inductive approach, the research tries to set new theories. In this study, the deductive approach will be followed because this approach is simple and analyzing the existing theories includes less time and cost. For a research, the research design is also very useful. There are three research designs are available – descriptive design, explanatory design and exploratory design (Smith 2015). Descriptive design helps to conduct the research by describing every facts and theories. On the other side, in case of exploratory research design, the research observes something and tries to explore the same. In explanatory research, the research explains the existing facts. In this study, the descriptive research design will be followed because it helps to analyze the research data in detail, which is very important to get the accurate result (Hovorka 2016).

Activities	Weeks
	1	2	3	4	5	6	7	8	9	10	11	12	13	14
Selecting the research Topic
Background research
Setting the aim and Objectives
Setting the research questions and hypotheses
Literature review
Setting the research methodology
Sampling
Primary data collection
Primary data analysis
Secondary data analysis
Data collection and analysis report due
Linking the objectives with the findings
Conclusion and recommendation
Final business research thesis due

Research objectives

Table 1: Gantt chart

(Source: Created by author)

This research will follow a systematic process to achieve the final goal. The research process will start from selecting the perfect topic of the research. After that the research will gather some background information regarding the topic. This will help to prepare the base line of the study. After gathering enough background information, the study will set the aim, objectives, questions and hypothesis of the study. Then the literature review of the study will be started. During the literature review, the research will try to find out the answers of the research questions. In the literature review, at first the literature review will identify the GAAP requirement and non-GAAP requirements, so that the comparison between these two can be made.

After that, the primary data will be gathered from the investors of Woolworths Limited and Wesfarmers Limited in Australia. The data will be collected through interview method. With the help of this data, the research will try to identify, how much the investors are benefited by using non-GAAP accounting measures and how much the investors prefer for the non-GAAP accounting measures. After gathering the primary and secondary data, the analysis will be done and the research will conduct in-depth analysis of the data through qualitative method. In the analysis, the research will try to identify the relationship between the use of non-GAAP accounting technique and the financial performance of the companies as per their financial reports. At the same time, it will also help to test the hypotheses of the study.

Data collected is an essential part of a research project. The success of a research depends on the quality and type of data that it collects and analyzes (Singh and Tewari 2015). There are two types of data used in the research projects – primary data and secondary data. As per the nature, the primary data are the new data, which is not available in any books, journals, websites and articles. On the other side, the secondary data are old or existing data, which are available in different journals, books, articles and websites (Smith 2015).

In case of this particular research, both types of data will be used. The primary data for the research will be collected by using the interview method. The interview will be conducted with the investors, who invest in the two major companies listed under Australian Stock Exchange and that are – Woolworths Limited and Wesfarmers Limited. The interview will be conducted with the investors because they have more knowledge of GAAP and non-GAAP accounting techniques as they deals with the analysis of financial reports of various companies. With the help of these interviews, it will possible to gather real data from the market. On the other side, the secondary data for the research will be collected from different journals, books, websites and the financial reports of various companies in Australia.

Research question

Along with the data collection, data analysis is also an important part of the research project. The research gets the final result through the proper analysis of the collected data. The data of the study can be analyzed with the help of two techniques – quantitative data analysis technique and qualitative data analysis technique (Flick 2015). Quantitative data analysis technique is a mathematical way to analyze the data. This technique is very useful for analyzing the data, which are collected through surveys. The results that are obtained through quantitative analysis are easy to understand because in this analysis, the result is in numeric format, which is easy to understand (Singh and Tewari 2015).

Apart from the quantitative data analysis, there is also qualitative data analysis technique. In this particular technique, in-depth analysis of data is done. The qualitative data analysis technique is very useful for analyzing the data, which are collected through interview or focus group or observation (Smith 2015). This is not a mathematical technique of analyzing the data. In this particular study, the qualitative technique of data analysis will be selected because the data of the research will be gathered through interview. At the same time, the qualitative data analysis technique provides the detail view of the facts.

The research in which the primary data is used, sampling is the essential part. Sampling is the process through which the research participants are selected for gathering the primary data. Sampling can be of two types – probability sampling and non-probability sampling (Flick 2015). Probability sampling is done, where the population size is vast and the non-probability sampling is done, where the population size is less.

In case of this particular study, the non-probability sampling method will be followed because the number of investors agreed for the interview is less. Due to this, the population size is small and so the non-probability sampling technique will be followed. The requires for the interview will be made to 20 investors in Woolworths and Wesfarmers Limited and it is expected that at least 50% that is 10 investors will be agreed to take part in the interview process.

This research may face some limitations, which create barrier for completing the research successfully. The first limitation that may take place is the availability of data. The primary data of the research will be gathered by interviewing the investors. However, convincing the investors for interview will be very difficult. Hence, the availability of proper data can be a limitation. Other than this problem, the time and costs may be the limitation of the study. This is because time and costs are limited and completing the study within that limited time and cost will be very difficult.

Research Hypotheses

It is expected that after conducting this particular research, the research questions will be solved. Based on the literature review, it can be expected that the research will identify a positive relationship between the use of non-GAAP accounting measures and the financial results of the companies. This is because with the help of non-GAAP accounting measures, the companies can identify the income accurately. At the same time, it is also expected that the study will identify that the investors of the companies are benefited because of the use of non-GAAP accounting measures by the companies like, Woolworths Limited and Wesfarmers Limited. Apart from these two, the study will also identify the other benefits and limitations or challenges of using the non-GAAP accounting measures. On the other hand, it can be expected that the research will identify the differences between the GAAP accounting measures and non-GAAP accounting measures. The hypotheses of the study are expected to be met.

Reference list:

Bentley, J.W., Christensen, T.E., Gee, K.H. and Whipple, B.C., 2016. Disentangling managers’ and analysts’ non-GAAP reporting incentives.Available at SSRN 2610995.

Black, D.E., Black, E.L., Christensen, T.E. and Gee, K.H., 2015. CEO compensation incentives and non-GAAP earnings disclosures.

Black, E.L., Christensen, T.E., Kiosse, P.V. and Steffen, T.D., 2015. Has the Regulation of Non-GAAP Disclosures Influenced Managers’ Use of Aggressive Earnings Exclusions?. Journal of Accounting, Auditing & Finance, p.0148558X15599131.

Bricker, W. and Siegel, M., 2016. Listening to Users on Transition Issues, Non-GAAP Measures, and Disclosures: Opening Remarks from the SEC and FASB. The CPA Journal, 86(7), p.28.

Brown, N.C., Christensen, T.E., Menini, A. and Steffen, T.D., 2016. Non-GAAP Earnings Disclosure and IPO Pricing. Available at SSRN 2803795.

Cheng, C.S., 2016. Discussion of ‘Nonâ€ÂGAAP earnings disclosures and IFRS’. Accounting & Finance.

Cormier, D., Magnan, M. and Demaria, S., 2016. A Look at EBITDA Reporting and Market. Cahier de recherche, p.02.

Demerjian, P.R., Donovan, J. and Larson, C.R., 2016. Fair value accounting and debt contracting: Evidence from adoption of SFAS 159. Journal of Accounting Research.

Flick, U., 2015. Introducing research methodology: A beginner’s guide to doing a research project. Sage.

Hovorka, A.J., 2016. Gender resources for urban agriculture research: methodology, directory and annotated bibliography.

Isidro, H. and Marques, A., 2015. The role of institutional and economic factors in the strategic use of non-GAAP disclosures to beat earnings benchmarks. European Accounting Review, 24(1), pp.95-128.

Leung, E. and Veenman, D., 2016. Non-GAAP Earnings Disclosure in Loss Firms. Available at SSRN 2825977.

Linsmeier, T.J., 2016. Revised Model for Presentation in Statement (s) of Financial Performance: Potential Implications for Measurement in the Conceptual Framework. Accounting Horizons.

Mackey, A. and Gass, S.M., 2015. Second language research: Methodology and design. Routledge.

Malone, L., Tarca, A. and Wee, M., 2016. IFRS nonâ€ÂGAAP earnings disclosures and fair value measurement. Accounting & Finance, 56(1), pp.59-97.

Mergenthaler, R.D., 2015. ACADEMIC EXPERIENCE. Review of Accounting Studies, 20(1), pp.470-500.

Misund, B. and Osmundsen, P., 2015. The Value-Relevance Of Accounting Figures In The Oil And Gas Industry: Cash Flow Or Accruals?. Petroleum Accounting and Financial Management Journal,34(2), p.90.

Silverman, D. ed., 2016. Qualitative research. Sage.

Singh, A. and Tewari, P.C., 2015. A Research Methodology for the Effective Implementation of JIT Based Production System in Indian Automotive Industries. In 2nd Mechanical Engineering Graduate Research Symposium (MEGRES), March (Vol. 21).

Smith, J.A. ed., 2015. Qualitative psychology: A practical guide to research methods. Sage.