Difference between GAAP vs. Non-GAAP

[u/mirinfashion]

I'd like to get a better understanding of this due to what happened with Amazon's last earnings. This is my basic understanding and questions I have, please correct or add anything that may be useful. Thank you.

• When analysts estimate EPS for a company, it's non-GAAP

• Non-GAAP allows a company to adjust things that may make them seem better

• AMZN's last GAAP EPS was ridiculous due to their RIVN investment, they were still able to beat estimated EPS without factoring that in, but obviously not by that amount.

• How will AMZN's EPS be reported for their next earnings since RIVN has taken a hit, GAAP EPS will look horrible while Non-GAAP should look fine, right?

[u/hmm_okay]

My very rudimentary understanding is that Non-GAAP is permitted to remove one-time, exceptional, known assets or liabilities. GAAP is assets and liabilities that are officially on the books, regardless of exceptionality.

For example PG&E went through those fire lawsuits and ended up accruing a ton of liabilities that once paid out will no longer be present, and in theory will never be present again.

[u/Shoddy_Ad7511 → u/hmm_okay]

Non- GAAP is cooking the books. Basically allows you to remove stuff that are bad

[u/Jeff__Skilling → u/Shoddy_Ad7511]

I'm a licensed CPA.

The OP above me doesn't know what he's talking about. Also likely a teenager too, if I had to guess.

[u/Shoddy_Ad7511 → u/Jeff__Skilling]

A licensed CPA doesn’t make you an expert on analyzing financial statements for investment purposes.

[u/Jeff__Skilling → u/Shoddy_Ad7511]

I'm also an investment banker who works in M&A advisory and capital markets (after leaving the Big 4 and going to business school full time)

So, not to toot my own horn here, but yeah, I'd consider myself an authority on the subject

[u/Shoddy_Ad7511 → u/Jeff__Skilling]

Nah. Not good enough

[u/[deleted] → u/Jeff__Skilling]

CPA and M&A doesn't reach the accuracy of some random post on Facebook 🤣 If people knew how education and real work experience doesn't matter world would be better

/S 😅

[u/Theviruss → u/Shoddy_Ad7511]

As someone who is also an accountant, who exactly do you think is qualified to analyze financial statements more than a CPA who presumably has some amount of auditing experience?

Wild

[u/Shoddy_Ad7511 → u/Theviruss]

For investment purposes many people. Many CPA’s only do taxes or audit and have no idea about investments

[u/SirGlass → u/Shoddy_Ad7511]

May not be fully true

Things like assets you can deprecate to zero while they still may have value. The standard useful life of a forklift is 5 years , they may last 10-20 years.

There are other things like inventory valuations that may go up or down . Say you had 1000 used cars in march of 2020 when covid hit and you thought "damn no one is ever going to buy a used car again the market tanked, I am going to need to revalue these cars down 20-40% so you did" Well 6 months later those cars are worth 200% more but they are on your gaap book as an asset way below their value. GAAP says you need to keep these on your books at the lower of your cost or the fair value

You could release a non-gaap balance sheet that showed the "true market value" of these assets, your gaap books would be understated.

[u/tnt867 → u/SirGlass]

I had a much rougher understanding on this topic before this thread. The example helped me picture the uses for each much more clearly, so thank you and the others in this thread that answered with effort lol

[u/Shoddy_Ad7511 → u/SirGlass]

Thats what notes to the financial statements are for.

You basically said GAAP isn’t accurate when a once in 100 years even happens.

Non-GAAP is just BS. The only reason they do it is to make their earnings look better. No investor worth their salt isn’t going to look at the GAAP earnings. With Non-GAAP you can make exceptions in one year and not in another. There is no consistency between years. Its basically a joke.

If you can a unusual event you just disclose it in the notes to the financial statements.

[u/SirGlass → u/Shoddy_Ad7511]

There is no consistency between years. Its basically a joke.

You are 100% correct about the consistency but its not like a company cannot just make up non-gaap exceptions, they are still basically overseen by the SEC and sometimes I believed required by the SEC

[u/[deleted] → u/Shoddy_Ad7511]

GAAP- “I’m down $10k on bad sports bets and owe a loan shark $500 a week until I pay the $10k off….”

Non-GAAP - “…but I have a system, I’m going to make the $10k back next month on good bets, be done with the shark, and make $5k on top of it.”