The past year provided little respite in the long-established war over non-GAAP measures…
You all know how it goes, but here it is again anyway: on the one hand, these measures seem to many to provide a perspective on financial condition or performance that isn’t as clearly obtained from the IFRS-compliant financial statements. On the other hand, the continuing lack of any standard definitions (among other things) constitute a greater risk that a particular measure might be misleading. At this point it seems likely that this tension will persist to the end of our accounting days (which hopefully might come a bit later than the end of all our other days, thus allowing the preparation of the ultimate closing balance sheet).
I’m always at the liberal end of such debates, figuring that there’s no point trying to save investors from themselves. Still, regulators have a point when they suggest practice in this area seems to be getting worse rather than better. A review of this year’s disclosures reveals numerous adjusted measures that, frankly, push right through the envelope and then right through whatever might have been sitting behind the envelope. I mean, just take a look for yourself…
Counterfactual indicative earnings This often-startling measure sets out the performance that would have resulted if defined major world events had transpired differently – for example, if Germany had won World War Two, if aliens had landed during the 1970’s, or if Twitter had never been invented. Since one can never be completely sure that we might not at some point be transported into an alternative universe in which these suppositions constitute reality, counterfactual indicative earnings provide a valuable means of avoiding harsh future surprises. Among many other interesting insights obtained, clothing retailers report that if we had been living in an ice age for the last decade, sales of fur coats and accessories would now be through the roof, with an encouraging impact on all key measures, and PETA be damned.
Socially rejuvenated revenue This measure reflects the sad reality that many organizations would report much higher revenue, if not for the inconvenient fact that many of their potential customers lack the money to spend on their products. For example, in a world of less cruelly restrained ambition, sales of expensive sports cars might increase by a factor of (estimating conservatively, of course) over a thousand. Socially rejuvenated revenue allows investors to look past these irrational constraints, satisfying their arithmetical and aspirational needs alike. Sadly, this particular adjusted measure seems to do very little for the reported results of broccoli growers.
Unfettered soul performance index It’s common to point out that a particular organization’s greatest strength is its people, but of course traditional accounting measures entirely fail to reflect this. This measure recognizes the limitless value and potential of the committed employee, increasing income and assets by a correspondingly limitless amount. Drawing on the best in inspirational and self-help literature, this measure removes the unnatural constraints from dreams, aspirations and ambitions, allowing corporations to report results on which the sky truly is the only limit.
Multiple-applied net income It’s common to view stock prices as a function of earnings times an appropriate multiple. This measure simplifies the valuation process by applying the multiple directly to current revenue (although not of course to costs, which will in no way increase in proportion). For temporarily tiny tech companies with large dreams, what could be more helpful than having those dreams pre-quantified on the income statement? And the larger the multiple they use to do the quantifying, the bigger the help to you the investor!
Earnings per engaged share As we know, the majority of shareholders never look at the financial statements or any other disclosures, making their investment decisions on the basis of rumour, whim, or whatever it may be. Since these shareholders are basically disconnected from the company’s communication practices, it’s useful to remove them from the calculation of EPS as well, presenting the calculation instead on the basis of the number of shareholders that are actually paying attention. For the not insignificant number of companies with no identifiable engaged shareholders, reported earnings per engaged share may approach infinity, placing those companies among the universe’s top performers!
Erotically quantified profit Much as we all claim to pay attention to financial matters, most of us reportedly spend a large chunk of our time thinking primarily about sex. This titillating measure reflects that reality by generating a profit figure galvanized by the collective sexual energy of the company’s workforce, customers and investors, resulting in suitably orgasmic results. Of course, the calculation of the measure must necessarily remain discreet, because it’s impolite to ask about such intimate matters, if not intolerant, and who wants to be accused of that…
You might share my opinion that some of these measures go a bit far. But on the other hand, if you analyze that opinion and subtract certain components of it, you might arrive at an adjusted opinion, concluding that it’s all the greatest thing ever. So nothing to worry about. Happy holidays!
The opinions expressed (if you add back certain things and subtract others) are solely those of the author