Adjusting reality

In the 1930s the SEC and accounting leaders established Generally Accepted Accounting Principles (GAAP) and for many years these principles were followed by the corporate world. But in the 21st century many companies announce both reported earnings and GAAP earnings. These reported earnings are always greater than GAAP earnings and are typically the earnings highlighted in the media. 

This practice is becoming used more. 19 of the 30 companies in the Dow Jones average reported both “adjusted” and GAAP earnings; naturally the adjusted earnings were highlighted in the press releases as they were 28.9% higher than GAAP earnings. And the reporting by companies is getting worse. Last year, only 16 of the 30 companies in the DJIA resorted to this beautification strategy. And they inflated earnings by only 19.7% on average.

It's not only DJIA companies that feature adjusted earnings. Twitter lost $80 million in Q1 under GAAP. But reported a non-GAAP profit of $103 million. Tesla inflated its revenues as well. Its Q1 “non-GAAP” revenues were $1.6 billion, up “over 45%” year-over-year. But its GAAP revenues were only $1.15 billion.