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GAAP vs. non-GAAP in an earnings report: Yahoo U

The 2019 third quarter earnings season is approaching its end with over 400 S&P 500 companies having already reported results.

A key part of these results for investors is the company’s earnings, and often, the release will show two different numbers: adjusted (non-GAAP) and GAAP.

GAAP is an acronym that stands for Generally Accepted Accounting Principles. It's a standard for how to report financial statements so that investors and the public have some idea on the methodology behind how companies arrive at their financial figures. It's actually required by the U.S. Securities and Exchange Commission. But sometimes companies want to report things outside of GAAP, which can lead to adjusted results, also sometimes referred to as non-GAAP or pro forma figures.

Companies do this because income statements reported on GAAP don’t always reflect the performance of a company’s operations, especially actions that include large one-time costs that can significantly change the company’s profits. For example, a company might write down an asset or restructure the organization. In these cases the company reports adjusted (non-GAAP) earnings, which would exclude those actions.

The adjusted earnings could show a better underlying performance for the quarter. There can be substantial differences between GAAP and non-GAAP earnings. But how large can those differences be? Well, it's widened a bit in this post-crisis period, according to a data set from Credit Suisse using Thomson Financial, FactSet, and S&P data.

Pro forma or non-GAAP earnings tend to be higher than GAAP earnings. GAAP accounting is more stringent on what has to be baked into your figures. So, if there were indeed one-time impacts, you can't parse that out. But non-GAAP may invite some more gray area into accounting. 

Valentina Caval is a producer at Yahoo Finance. Brian Cheung is a reporter at Yahoo Finance.

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