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Correction
The words adjusted, core, or non-GAAP do not decide whether a measure is useful or misleading. Reproduce the measure from its most comparable GAAP amount and test every adjustment and presentation claim.
Test the measure
Confirm the label, definition, period, purpose, and arithmetic reconciliation. For each adjustment, identify the transaction, cash effect, observed recurrence, operating role, management discretion, treatment of comparable gains and losses, and consistency across periods. Then ask whether a peer could reproduce the measure from disclosed information.
Suppose a company excludes location-opening costs while it continues to open locations. Calling the costs nonrecurring does not establish that they are irrelevant to current operations or future cash needs. Yet the exclusion might still help answer a narrower question about mature locations if the company defines that question and supplies a complete reconciliation.
Check your answer
State what the adjusted measure can help a reader decide and what it cannot. Retain the cost's cash effect when it exists. Do not infer lower future cash needs from higher adjusted earnings. For an SEC registrant, also check the current presentation and reconciliation requirements that apply to the stated filing or communication.
When this mistake may appear
- Management calls a cost nonrecurring.
- A reader rejects a measure only because it is non-GAAP.
Your work may contain this mistake if:
- Accepts an exclusion because of management's label.
- Treats every non-GAAP measure as misleading.
- Infers cash availability from a higher adjusted subtotal.