US companies have continued to adjust their net income figures in 2021 to exclude billions of dollars worth of items, according to a new report from financial data provider Calcbench.
Just years after a Securities and Exchange Commission crackdown on the overuse of non-standard accounting measures, companies across the S&P 500 index have resumed the practice en masse during the pandemic, the report says, matching findings of a report made a year ago.
This time, Calcbench looked at the 2021 earnings releases of a group of 123 randomly selected companies 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 using generally accepted accounting principles, US standard and non-GAAP figures. in versions from 2020.
The researchers found that non-GAAP net income exceeded GAAP net income by an average of $460 million per company, or about 14% of GAAP net income.
They found a total of 718 individual matching items from the sample group with a total value of nearly $86 billion and an average value of nearly $120 million per item.
“These results call into question the informative value of GAAP net income as reported and raise questions about companies’ motivations for reporting adjusted net income,” the authors wrote.
What it really shows is that companies think GAAP accounting doesn’t explain what they’re doing in terms of financial profitability, said Pranav Ghai, chief executive of Calcbench.
“GAAP requires them to tell a story, but they want to tell their own story,” he told MarketWatch.
See also: Pharmaceutical companies make accounting change after SEC cracks 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 reports, but companies must give equal or greater prominence to the GAAP numbers and explain how the two are reconciled.
The guidelines came after 90% of S&P 500 companies reported non-GAAP numbers in 2015, up from about 70% in 2009. The gap between the two has also widened significantly. Non-GAAP earnings per share exceeded GAAP earnings per share by 25% on average in 2015, compared to a difference of only 6% in 2013.
The largest adjustment category in the 2021 sample was amortization of intangibles, which accounted for half of all adjustments. This category was also the largest last year, when it accounted for 30% of all adjustments.
Read also: Cigna’s use of adjusted earnings in quarterly results does not comply with SEC rules, experts say
In the sample group, Broadcom Inc. AVGO,
had the largest intangible adjustment amortization at $5.8 billion, followed by Johnson & Johnson JNJ,
at $5.3 billion.
But it was Bristol-Myers Squibb Co. BMY,
which was not included in the sample, which had the largest adjusted number of any S&P 500 company at $10 billion, giving it non-GAAP earnings per share of $7.51 per compared to a GAAP number of $3.12. Bristol-Myers also had the biggest adjustment in the 2020 study 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 amortization of intangible assets? Should they just be tested annually like traffic? Maybe this change should only affect the pharmaceutical industry? asked the report.