GAAP vs Non-GAAP

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Difference Between GAAP and Non-GAAP

GAAP stands for Generally Accepted Accounting Principles and lays down a uniform set of rules and formats, along with guidelines for measurement, presentation, disclosure, and recognition that companies need to follow in their method of accounting. On the other hand, Non-GAAP is any method of accounting followed by companies other than GAAP where non prescribed standards are followed. It is also called adjusted earnings.

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GAAP vs NON-GAAP Infographics

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Key Differences GAAP vs NON-GAAP

The key differences are as follows –

  • Generally Accepted Accounting Principles (GAAP) follow a set of standards and formats in accounting, whereas NON-GAAP does not follow standards and formats in accounting.
  • All public companies should follow GAAP reporting; private companies, at their option, can follow either GAAP or non-GAAP accordingly in the smooth running of their business operations.
  • In GAAP, non-recurring expenses will be in financials, but in non-GAAP non – recurring expenses will be excluded to depict the true picture of business operations.
  • The window dressing of profitability in the company's financial statements is not possible in GAAP; in non-GAAP, there are chances to understate its profitability 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 statements to arrive at non-GAAP numbers: acquisitions and divestitures, restructuring costs, litigation and settlements, depreciation and amortization, impairment of goodwill and property, plant and equipment (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 EBITDA – earnings before interest, tax, depreciation, and amortization; through EBITDA, the analysts understand the operating performance of the company, EBITDA is calculated as – EBIT +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

CriteriaGAAPNon-GAAP
AccountingPrescribed standards and formats are followed in accounting methods by the companies.No such prescribed standards, any method of accounting can be followed by the companies.
Investors and Creditors AnalysisIt is useful to the investors in the analysis of their investments by going through financial statements, but a little difficult to understand the standard format.common users, investors, and creditors can easily understand financial statements.
StandardsThis is the industry standard.It is not an industry standard.
Business OperationsShows a clear picture of business operations from a financial point of view.Some adjustments to be made to give a clear picture of business operations.
Non-Recurring ExpensesNon-recurring expenses will be included in its financial statements.Non-recurring expenses will be excluded in its financial statements.
Window DressingThere is no scope for window dressing of profitability in financial statements.There is scope for window dressing of profitability in financial statements.
Comparison of Financial ResultsThere is a reliable comparison of financial results from Industry to industry, company to company and year to year.No reliable comparison of financial results between company to company, industry to industry and year to year.

Conclusion

  • No doubt GAAP is the prescribed standard followed in accounting methods, 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 reporting. 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.