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Called to Account: U.S. companies are still making billions of dollars in adjustments so that their earnings look better, study finds


U.S. companies continued to adjust their net income numbers in 2021 to exclude billions of dollars worth of items, according to a new report from financial data provider Calcbench.

Just a few years after a Securities and Exchange Commission crackdown on the overuse of nonstandard accounting metrics, companies in the S&P 500 index resumed the practice in droves during the pandemic, the report found, matching the findings in a report conducted a year ago.

This time, Calcbench reviewed earnings releases from 2021 from a group of 123 companies that were randomly selected from the S&P 500.

That means it’s not quite an apples-to-apples comparison with last year’s report, which focused on the 59 companies with the biggest difference between their GAAP numbers, or those reported under Generally Accepted Accounting Principles, the U.S. standard, and non-GAAP numbers in releases from 2020.

Researchers found that non-GAAP net income was higher than GAAP net income by an average of $460 million per company, equal to about 14% of GAAP net income.

They found a total of 718 individual reconciling items from the sample group with a total value of almost $86 billion and an average value of almost $120 million per item.

“These findings question the informative value of as-reported GAAP Net income and raise questions about companies’ motivations in reporting Adjusted Net Income,” the authors wrote.

Source: Calcbench

What it really shows is that companies think GAAP accounting does not explain what they do in terms of financial profitability, said Pranav Ghai, chief executive of Calcbench.

“GAAP makes them present a narrative, but they want to tell their own story,” he told MarketWatch.

See also: Drug companies are making an accounting change after the SEC cracked down on Biogen

The SEC issued new guidelines for corporate reporting in 2016 in an effort to slow the proliferation of non-GAAP numbers and rein in the worst offenders. The SEC allows companies to use non-GAAP numbers to supplement their reporting, but they must give equal or greater prominence to GAAP numbers and explain how the two are reconciled.

Those guidelines came after 90% of S&P 500 companies reported non-GAAP numbers in 2015, up from about 70% in 2009. The spread between the two had also widened significantly. Non-GAAP earnings per share were higher than GAAP earnings per share by an average of 25% in 2015, compared with a variance of just 6% in 2013.

The single biggest category of adjustment in the 2021 sample was amortization of intangibles, which accounted for half of all adjustments. That category was also biggest last year, when it accounted for 30% of all adjustments.

Read also: Cigna’s use of adjusted revenue in quarterly earnings does not conform with SEC rules, experts say

In the sample group, Broadcom Inc.

had the biggest amortization of intangible adjustment at $5.8 billion, followed by Johnson & Johnson

at $5.3 billion.

But it was Bristol-Myers Squibb Co.
which was not included in the sample, that had the biggest adjusted number of any company in the S&P 500 at a stunning $10 billion, that gave it a non-GAAP per-share earnings number of $7.51 compared with a GAAP number of $3.12. Bristol-Myers had the biggest adjustment in the 2020 study too at $9 billion.

For Calcbench, the study raises some questions for companies, regulators and investors to consider.

“Should GAAP accounting rules change and not require the amortization of intangibles? Should they just be tested annually like goodwill? Maybe this change should be only for the pharmaceutical industry?” the report asked.

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