Mind The GAAP

Generally accepted accounting principles (GAAP) are “generally accepted” for a reason.

“Generally” speaking, they give the public a yardstick by which to measure performance.

The problem for corporate management teams is that adhering to GAAP makes it more difficult to fudge the numbers when it comes to appeasing investors. You might say management doesn’t “generally accept” these accounting principles when it means reporting numbers that don’t measure up to expectations.

And so, we get “pro-forma”- or “make-believe” – numbers instead. These figures allow companies to tell investors what the numbers would have looked like if this or that did or didn’t happen or if this or that is or isn’t excluded or, alternatively, what the numbers will look like based on certain assumptions about the future.

So they’re fake numbers. Fun stuff.

The really fun part is that CFOs get to tell analysts all about the “adjusted” numbers on conference calls, after which high fives are exchanged all around… “I pro-forma’d the f*ck out of those people in there! Voila! “…

And so, as earnings season gets underway, consider the following in the context of everything said above.

Via SocGen

As markets start to warm up for the financial firework show that is the US reporting season, all eyes will be on those 2017 expectations. We expect a reasonable degree of optimism, not to mention lots of enthusiasm for building stuff in the US. We will be focussing on those reports and accounts and specifically the evolution of GAAP earnings, which whilst having bounced strongly in 2016, courtesy of better energy prices, have once again started to tail off ex energy, and whilst pro-forma EPS is 14% higher over the last 3 years, GAAP EPS has gone nowhere.