Difference Between GAAP and Non-GAAP
GAAP stands for Generally Accepted Accounting Principles, lays down a uniform set of rules and formats, along with guidelines for measurement, presentation, disclosure and recognition where companies need to follow in its method of accounting, on the other hand, Non-GAAP is any method of accounting followed by the companies other than GAAP where non prescribed standards are followed. It is also called as adjusted earnings.
GAAP vs NON-GAAP Infographics
Key Differences GAAP vs NON-GAAP
The key differences are as follows –
- Generally Accepted Accounting PrinciplesGenerally Accepted Accounting PrinciplesGenerally accepted accounting principles (GAAP) are the minimum standards and uniform guidelines for the accounting and reporting. These standards prohibit firms from engaging in unethical business activities and enable for a more accurate comparison of financial reports to investors. (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. 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. at their option can follow either GAAP or non-GAAP accordingly in the smooth running of its 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. 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..
- The window dressing of profitability in financial statements of the company 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. in financial statements.
- GAAP provides a reliable comparison of financial results between industry to industry, company to company and from year to year, but the reliable comparison is not in non GAAP following companies.
- Some companies following GAAP exclude some line-item expenses from its 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. to arrive at non GAAP numbers they are: acquisitionsAcquisitionsAn acquisition is defined as the act of taking over or gaining control of all or most of another entity's stocks by purchasing at least fifty percent of the target company's stock and other corporate assets. and divestituresDivestituresDivesting, also known as divestiture, refers to the sale or transfer of the significant assets, divisions, investment of the business due to some financial, political or social reasons such as a business can sell the department which is not a core part of the business and is not providing benefits to the company so that the business can focus on the units that can provide better earnings., 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., 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. 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. (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 – 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. +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 its net earnings to GAAP.
Comparison of Table
|Accounting||Prescribed 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 Analysis||It 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.|
|Standards||This is the industry standard.||It is not an industry standard.|
|Business Operations||Shows 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 Expenses||Non-recurring expenses will be included in its financial statements.||Non-recurring expenses will be excluded in its financial statements.|
|Window Dressing||There 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 Results||There 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.|
- 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., 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 its 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 standardize financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. . Investors should keep in mind that they can interpret Non-GAAP figures, but GAAP figures are more appropriate. Most public companies, in addition to the GAAP, 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 along with infographics and comparison table. You may also have a look at the following articles –