It seems like it was just last year when we mused if non-GAAP earnings measurements were becoming a permanent fixture of the market. How quickly the times change.
Two giants in the tech industry – Facebook and Google – both recently announced their decision to move away from reporting non-GAAP measures. The tech industry as a whole is well-known for excluding stock-based compensation expenses from their adjusted earnings measures. The exclusion of stock-based compensation expense inflates earnings for companies that routinely issue large amounts of stock, but some would argue that disclosure of such adjusted measures has merit. Debate continues about whether such adjusted earnings are misleading or helpful.
It’s interesting to note that Google warned its investors well in advance of its switch to GAAP-based earnings measures, while Facebook made its change more abruptly (which apparently led to some confusion among investors and analysts). Both companies are profitable (even with full accounting for stock-based compensation expense), which lessens the impact of the change in disclosure. Business Insider notes that one of Facebook’s main rivals, Snapchat, is suffering from losses and would be unable to make a similar change without a more substantial impact to its bottom line.
It appears the debate over stock-based compensation expenses is not over yet, and that makes evaluating financial statements with a critical eye more important than ever.
- Why Quality Matters in Valuation for Equity Compensation Grants
- Guest Post: Solving the Conundrum Presented by Non-GAAP Financial Measures
- Non-GAAP Measures: The SEC Updates Interpretation of Disclosure Regulations
Mercer Capital’s Financial Reporting Blog
Mercer Capital monitors the latest financial reporting news relevant to CFOs and financial managers. The Financial Reporting Blog is updated weekly. Follow us on Twitter at @MercerFairValue.