Statistics And Business Research Incentives Method

Accounting Standards and Non-GAAP Earnings

Discuss about the Statistics and Business Research Incentives Method.

According to Bentley et al. (2016), research indicates how the disclosure of Non-GAAP earnings renders usefulness to the potential investors for predicting the future earnings. It has been investigated by the researchers the impact of disclosure of Non-GAAP earnings by companies for reporting under IFRS as well as disclosures by the analysts. On examining Australian Listed Companies for given years, it has been derived that companies discloses Non-GAAP earnings possessing higher incidence as well as magnitude of profit or loss as reflected measuring items such as asset remeasurements  and impairment in the financial statements. On analysis, it has been found that Non-GAAP disclosing companies likely to assist analyst adjustments to earnings for the items as well as lowering the forecast error and dispersion (Venter, Emanuel and Cahan, 2014).

As rightly put forward by Baumker et al. (2013), there are various implications on disclosure of Non-GAAP earnings helping analysts for understanding the organizational performance, cash flows as well as financial conditions. Therefore, the research involves non-proforma earnings leading to less error as forecasted values as well as dispersion for the given year. This research indicates use of Non-GAAP earnings that help investors for conducting fundamental analysis for declaring assumptions based on historical data. In other words, Non-compliant implies standardized rules as well as regulations as stated under GAAP (Doyle, Jennings and Soliman, 2013).

As opined by Baumker et al. (2013), Disclosure of adjusted IFRS earnings has been observed in most of the countries. These theories initiate preparers for gaining understanding for the incentives and additional earnings disclosures. For Instance, voluntary disclosures help in reducing the information asymmetry between companies as well as capital providers in diminishing the agency problem. In other words, additional disclosures bring improvement in the level of credibility for mitigating the “lemons” problem. This further reveals preparers for disclosing additional earnings for measuring in assisting investors for better understanding performance of the entity. On the contrary, investors indicating findings of additional earnings measuring for making final investment decisions especially for Non-GAAP measures (Curtis, McVay and Whipple 2013. Therefore, some of the analysts aim at maintaining adjustments to GAAP earnings for modifying effects of accounting entries in relation with business operations underlying business reality.

There is some of the academic evidence provided for supporting the claims. () argues finding of operating earnings as presented by analysts for bringing strong association with share price in comparison with GAAP net income (Cheng et al. 2016). It has been analyzed that analysts as well as managers earnings exclude some non-recurring or non-operating items like restructuring as well as acquisition charges in gains or losses on sale of assets. On the contrary, it has been noticed that GAAP net income contains most of the non-operating items that reduces the value relevance in comparison with operating income (Bansal, Seetharaman and Wang 2013).

Analysts and Non-GAAP Earnings

As rightly put forward by Baumker et al. (2013), analysts adjust GAAP earnings from their income prediction models especially for the non-recurring items. In other words, Non-GAAP earnings is useful for the investors as it is more strongly associated with returns as well as share price and future earnings. The analysts in relating restructuring (22%), realized investment gains (22%) as well as acquisition (14%) and asset sales (11%) exclude some of the items. These are some of the items excluded by the managers as well as analysts for understanding the predictive ability in gaining information from the analysts. On the contrary, analysts majorly guide regarding pro forma earnings for given year as analysts exclude special as well as other items.

Baumker et al. (2013) argues examining the relationship of adjustments especially for fair value measurements gains or losses and impairment expenses involving managers as well as analysts. In other words, prior studies propose companies disclosing Non-GAAP adjustments for those items in adjusting by analysts. In case companies, conduct Non-GAAP disclosures for highlighting the relevant items to potential analysts for gaining additional information. On the contrary, it expects observing an association between companies Non-GAAP earnings disclosures as well as analyst’s adjustments (Black et al. 2015).

As rightly put forward by Baumker et al. (2013), Non-GAAP Disclosures has been used by some of the managers for meeting earnings for shaping investors’ perceptions. In other words, it considers both information as well as strategic motives for Non-GAAP disclosures for future analysis purpose. On the contrary, it concludes the exclusion of transitory items by linking achievable income. This report indicates the items for adjusting relational aspects such as fair value measurement (Black et al. 2013).

Baumker et al. (2013) suggest Non-GAAP earnings rendering information and involve market participants for interpreting purpose. In other words, these prices will reflect upon the implications of excluded items especially for future earnings. Investors, on the other hand, under react excluded components as indicated in market mispricing. It helps in examining both forecasting as well as value relevance from excluded items. It means extending the line of research as well as indicating the mispricing for higher quality reconciliation statements (Black et al. 2015).

To depict positive implications between GAAP and NON-GAAP Accounting standards as presented in the financial statements

• To understand the guidelines provided in GAAP financial reporting involving fairness in reporting standards after inclusion of Non-GAAP financial reporting
• To investigate effectiveness of Non-GAAP components in SME in compiling with GAAP Standards
• To predict final decision-making process as well as ethical use of GAAP and Non-GAAP component as presented in the financial statementearnings?

The research methodologies and techniques are the crucial parts of the research, which will help the researcher to reach at the desired outcome. As commented by Denzin (2012), the use of effective and suitable research methodologies helps the researcher to identify the research essence for obtaining quality input. In order to conduct this specific research, the researcher will conduct qualitative analysis of the different issues related to contemporary accounting. The research methodology is based on data accumulation from diverse sources to identify the different constituents of “Non-GAAP” financial reporting.       

Usefulness of Non-GAAP Information

`In the words of Flick (2015), the research methodology mainly aims to address the different research questions developed to suit the research purpose. In addition, the research onion will play a crucial role in attaining effective research results. In this context, Mackey and Gass (2015) cited that research onion is an effective way to obtain accurate outcome after completing six diverse tasks. This is because the six layers of the research onion will be directly related to the research process, which will help the researcher to choose the right philosophy, strategy and time horizon of the research.

For this particular research, the researcher will use the philosophy of positivism, explanatory research design and deductive research approach. The philosophy of positivism will be used, as this philosophy helps in relating the existing theories and models with the current research context. The other research philosophies will not be used, since they fail to link the scientifically proven theories and models with the data accumulated. In addition, the researcher will use the explanatory research design, which will help in evaluating the root-cause relationship by anticipating the probable future results of the ongoing process (Panneerselvam 2014). In addition, the explanatory research design will help the researcher to depict the inclusion of “Non-GAAP” earnings in the depreciation, interest, goodwill, taxes, merger costs and “stock-based employee pay”.

Finally, the researcher will follow the deductive research approach, as the researcher will derive the outcome of the study based on the existing proven models and theories. The inductive approach will not be applied, as the researcher will not frame any own model based on the research outcomes.

For this particular research, the researcher will conduct interview with the investors and financial analysts in order to accumulate primary data. Simple random sampling will be used to gather data from the financial analysts, while convenience sampling will be used to conduct interview with the investors. In this context, Brinkmann (2014) cited that the conduction of qualitative analysis would help the researcher to obtain a deep insight on the opinions of the respondents, which will help in achieving appropriate outcomes.

The secondary data will be collected from the annual report of Perficient Inc as an internal source, while the external sources like journals, articles and statistical websites will be considered. In addition, the secondary data will be applied for stating the significance of “Non-GAAP” reporting, magazines and websites of small and medium-sized companies. Finally, the researcher will maintain the ethical integrity by maintaining the confidentiality of the respondents, who will participate in the research.

The diverse range of measures to be taken into account for the research process comprises of the extent of the open-ended questions asked to the management accountants. With the help of such questions, the researcher will be able to gain a thorough understanding of the different qualitative aspects of the research data. In order to proceed further with the research, the researcher will select 50 investors and 50 financial analysts to identify the significance of the financial declaration of non-GAAP. 

For secondary data, the researcher will dissect the annual report of Perficient Inc to gain an understanding of the reconciliation of GAAP to non-GAAP measures. The researcher will frame questions for the investors and financial analysts for conducting face-to-face interviews, which will help in identifying several issues in the current GAAP standard of reporting.

Research Objectives

Along with this, the researcher will not attempt to manipulate the responses obtained from the financial analysts and investors for ensuring the validity and reliability of the research study. In addition, the secondary data obtained will be from the official website of Perficient Inc that will help in identifying the importance of the financial declaration of non-GAAP. Furthermore, the researcher will store the data collected in a database, which will be evaluated further with the help of excel application. The excel application will only be used to evaluate the secondary data, since the primary data will be obtained by conducting qualitative interviews. Henceforth, this research will aim to evaluate the effectiveness of the non-GAAP in small and medium-sized companies, which follow the GAAP accounting standard.

The learners intend to make use of both the primary as well as secondary data for the present study. The current section concentrates on analysis and interpretation of the data that essentially refers to the process of inspection, cleansing, transformation as well as modeling of data with the objective of deciphering useful information.

The current section presents the process of selection of the requisite data for the present study using the simple random sampling as well as convenience sampling. The simple random sampling refers to the fundamental mechanism for the selection of the data for the particular study from a population. The simple random sampling is idyllic for definite financial analysts that follow the accounting standards and guidelines of GAAP and acquire sampling data founded on both optimistic as well as pessimistic responses associated to the advantages of the disclosures of the “Non- GAAP” earnings. Again, the application of the convenience sampling can help in accessing the investors of the corporation Perficient Inc. Again, the present study also makes use of the convenience sampling, a type of non-probability sampling that essentially depends on collection of data from a particular population. This type of convenience sampling can help in accessing the accessing the investors of the corporation Perficient Inc.

The responses of the investors to the pertinent questions in the questionnaire and the available financial declarations of the company can be used for quantitative analysis. The quantitative analysis refers to the evaluation of the present situation, especially the financial conditions and events by way statistical as well as mathematical modelling techniques. This can help in enumeration of particular quantities of specific constituents present in the present circumstances.

Research Methodologies and Techniques used in the research project

In this present case, the qualitative evaluation of pertinent internal as well as external sources of secondary data indicates towards the examination of diverse non-measurable data. The appraisal of the accessible prior literature is fundamentally concept centric and the evaluation of existent contents can aid the process of thematic analysis. As such, the evaluation of the significant themes of the academic literature, experiential evidences in addition to earlier studies can help in breaking down the significant information, recognition of the important information plus synthesis of the piece of writings to pull out the unique concepts. Besides this, the narrative analysis of the specific secondary data can take into account different stories to offer meaning to diverse important findings of the present research. Again, this can facilitate the process of dealing with data as important stories that can assist in inferring summary from the obtainable data. However, in the present case, the process of qualitative analysis refers to the investigation of the prior literature as well as viewpoints of the investors regarding the advantages of the disclosures and guidelines in non- GAAP policies, effectiveness of the non-GAAP components, implications of the non-GAAP standards on the financial statements. Again, the interview with the investors and their responses towards the advantages of disclosures of the “Non-GAAP earnings” can also be analysed using qualitative techniques of the responses to the questions framed in the interview. The micro-interlocutor analysis can also be used for evaluation of the information arising from one or more focus groups, targeted group of investors about which the specific participants responds to each question.

Therefore, the learner can make use of quantitative data from surveys, financial declarations of the firm as well as observations for the purpose of the present study. Thereafter, the learner can implement a wide array of statistical as well as mathematical mechanisms to evaluate the quantitative data. Again, the learner can also acquire the qualitative data from the prior literature as well as responses of the interviews.

The expected results of the project are majorly related with advancement of theoretical understanding of Non-GAAP earnings in financial reporting. By using cross-disciplinary approach, this research project will be attracting the potential investors for discovering completely new theoretical openings of Non-GAAP earnings. Future expected outcomes of the present research outcome would be investigating regarding IFRS measurements in association with voluntary disclosure of Non-GAAP earnings especially for security market analysts. Practitioners will be providing commentary by analysts for active adjustment of IFRS earnings for arriving for assessing the current performance as well as predicting future earnings. Analysts will further measure items for raising questions regarding the requirements of accounting standards. Managers as well as analysts adjust IFRS measuring items as a effective part of underlying earnings.

Research Process

References and Bibliography

Bansal, N., Seetharaman, A. and Wang, X.F., 2013. Managerial risk-taking incentives and non-GAAP earnings disclosures. Journal of Contemporary Accounting & Economics, 9(1), pp.100-121.

Baumker, M., Biggs, P., McVay, S.E. and Pierce, J., 2013. The disclosure of non-GAAP earnings following Regulation G: an analysis of transitory gains. Accounting Horizons, 28(1), pp.77-92.

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., Christensen, T.E., Kiosse, P.V. and Steffen, T.D., 2013. Does management discussion of pro forma earnings in press releases and conference calls influence street earnings exclusions. In Working Paper presented at American Accounting Association conference.

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.

Brinkmann, S., 2014. Interview (pp. 1008-1010). Springer New York.

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 ‘Non?GAAP earnings disclosures and IFRS’. Accounting & Finance.

Curtis, A.B., McVay, S.E. and Whipple, B.C., 2013. The disclosure of non-GAAP earnings information in the presence of transitory gains. The Accounting Review, 89(3), pp.933-958.

Denzin, N.K., 2012. Triangulation 2.0. Journal of Mixed Methods Research, 6(2), pp.80-88.

Doyle, J.T., Jennings, J.N. and Soliman, M.T., 2013. Do managers define non-GAAP earnings to meet or beat analyst forecasts?. Journal of Accounting and Economics, 56(1), pp.40-56.

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

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.

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

Marais, H.C. and Pienaar-Marais, M., 2016. Analysis of Research Methodology in Business and Management Studies as Reflected in the ECRM 2015 Proceedings. In ECRM2016-Proceedings of the 15th European Conference on Research Methodology for Business Management”: ECRM2016 (p. 167). Academic Conferences and publishing limited.

Panneerselvam, R., 2014. Research methodology. PHI Learning Pvt. Ltd.

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Taylor, S.J., Bogdan, R. and DeVault, M., 2015. Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons.

Venter, E.R., Emanuel, D. and Cahan, S.F., 2014. The Value Relevance of Mandatory Non?GAAP Earnings. Abacus, 50(1), pp.1-24.