Difference Between GAAP and Non-GAAP

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GAAP vs NON-GAAP Infographics

Key Differences GAAP vs NON-GAAP

The key differences are as follows –

  • Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGAAP (Generally Accepted Accounting Principles) are standardized guidelines for accounting and financial reporting.read more (GAAP) follow a set of standards and formats in accounting, whereas NON-GAAP does not follow standards and formats in accounting.All public companiesPublic CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market.read more should follow GAAP reporting; private companiesPrivate CompaniesA privately held company refers to the separate legal entity registered with SEC having a limited number of outstanding share capital and shareowners. read more, at their option, can follow either GAAP or non-GAAP accordingly in the smooth running of their business operations.In GAAP, non-recurring expensesNon-recurring ExpensesNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more will be in financials, but in non-GAAP non – recurring expenses will be excluded to depict the true picture of business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company’s goals like profit generation.read more.The window dressingWindow DressingWindow dressing in accounting refers to the intentional manipulation of financial statements by company management in order to present a more favourable picture of the company to users of the financial statement before it is released to the public.read more of profitability in the company’s financial statements is not possible in GAAP; in non-GAAP, there are chances to understate its profitabilityProfitabilityProfitability refers to a company’s ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company’s performance.read more in financial statements.GAAP provides a reliable comparison of financial results from industry to industry, company to company, and year to year. Still, the reliable comparison is not in non-GAAP following companies.Some companies following GAAP exclude some line-item expenses from their financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more to arrive at non-GAAP numbers: acquisitionsAcquisitionsAcquisition refers to the strategic move of one company buying another company by acquiring major stakes of the firm. Usually, companies acquire an existing business to share its customer base, operations and market presence. It is one of the popular ways of business expansion.read more and divestituresDivestituresDivesting refers to the act of partially or entirely selling organizational assets to generate funds urgently.read more, restructuring costsRestructuring CostsRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements.read more, litigation and settlements, depreciation and amortization,  impairment of goodwillImpairment Of GoodwillGoodwill impairment is the process of writing off the accounting charge amounting to the excess of the acquired asset’s book value as recorded in the financial statements over its fair value. A higher impairment charge reflects the company’s irrational investment decisions. read more and property, plant and equipmentProperty, Plant And EquipmentProperty plant and equipment (PP&E) refers to the fixed tangible assets used in business operations by the company for an extended period or many years. Such non-current assets are not purchased frequently, neither these are readily convertible into cash. read more (PPE).GAAP follows prescribed standards and principles; non-GAAP follows three methods to show a net profit – they are adjusted earnings, the most popular measure for Non-GAAP is EBITDAEBITDAEBITDA refers to earnings of the business before deducting interest expense, tax expense, depreciation and amortization expenses, and is used to see the actual business earnings and performance-based only from the core operations of the business, as well as to compare the business’s performance with that of its competitors.read more – earnings before interest, tax, depreciation, and amortization; through EBITDA, the analysts understand the operating performance of the company, EBITDA is calculated as – EBITEBITEarnings before interest and tax (EBIT) refers to the company’s operating profit that is acquired after deducting all the expenses except the interest and tax expenses from the revenue. It denotes the organization’s profit from business operations while excluding all taxes and costs of capital.read more +Depreciation +Amortization, another measure for non-GAAP is EBIT- Earnings before interest and taxes. As per SEC – securities exchange commission guidelines, companies following non-GAAP should provide a reconciliation to report their net earnings to GAAP.

Comparison of Table

Conclusion

  • No doubt GAAP is the prescribed standard followed in accounting methodsAccounting MethodsAccounting methods define the set of rules and procedure that an organization must adhere to while recording the business revenue and expenditure. Cash accounting and accrual accounting are the two significant accounting methods.read more, but it does not suit every company, some adjustments to be made to the GAAP suitable to the company. Even though Non-GAAP is not a standard method, prescribed formats and standards are not followed, but it is accepted as a reporting method. All public companies should follow GAAP reporting in their accounting as per SEC- securities exchange commission guidelines.GAAP was developed by (FASB) financial accounting and standards board to provide a uniform set of rules, formats, and standardized financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more. Investors should keep in mind that they can interpret Non-GAAP figures, but GAAP figures are more appropriate. In addition to the GAAP, most public companies publish their financial figures in NON-GAAP formats as well for investors for a better understanding of companies’ financial statements. Non-GAAP is also called adjusted earnings.

This has been a guide to the GAAP vs Non-GAAP. Here we discuss the top differences between GAAP and non-GAAP, infographics, and a comparison table. You may also have a look at the following articles –

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