U.S. Generally Accepted Accounting Principles (GAAP) is widely viewed as the gold standard in financial reporting. Public companies must issue GAAP financial statements, and a recent survey found that most private businesses follow GAAP as well, though some carve out certain complex rules, such as the lease accounting guidance.
Even so, you may want to supplement your GAAP financials with non-GAAP metrics. Done well, this helps lenders, investors, and your own leadership team better understand your operations, profitability, and cash flow. The challenge is presenting those supplemental figures consistently and transparently. Here is how to do that.
GAAP is the set of rules and procedures accountants follow to record and summarize business transactions. These guidelines create the foundation for consistent, fair, and accurate reporting. Businesses that issue GAAP statements use the accrual method of accounting, recognizing revenue when it is earned (regardless of when cash arrives) and expenses when they are incurred (not necessarily when bills are paid). Lenders and investors tend to prefer GAAP financials because they make it easier to compare results over time and against other companies.
So why look beyond GAAP? Over the years, non-GAAP measures have grown more common because they answer questions that standardized statements sometimes cannot. Beyond helping your management team interpret results, these supplemental measures can prove useful when you apply for financing or evaluate a merger or acquisition. Some investors and executives even argue that certain unaudited figures offer a more meaningful read on performance than earnings reported strictly under GAAP.
The key word is supplemental. Before you rely on a non-GAAP metric, you need to understand exactly what it includes and excludes, or you risk basing decisions on an incomplete picture.
One of the most familiar non-GAAP metrics is earnings before interest, taxes, depreciation and amortization (EBITDA). Developed in the 1970s, it was designed to help investors gauge a business's long-term profitability and cash flow. Today it remains one of the most widely used yardsticks when a company is being bought or sold.
Here is where transparency becomes essential. Because non-GAAP measures are not governed by a single set of accounting standards, two businesses can calculate EBITDA in different ways. Some companies enhance the figure by excluding costs that are plainly part of doing business, such as stock- or option-based compensation. The Securities and Exchange Commission (SEC) has issued guidance on how public companies should present these measures, precisely because adjustments can vary so widely.
That variability makes fair comparison difficult. Stakeholders cannot evaluate a number they cannot trace. So whenever you present EBITDA or a related metric, be prepared to show how the figure was derived, what adjustments were made, why each adjustment is appropriate, and how management uses the metric internally.
A few practices keep non-GAAP reporting credible:
Used alongside traditional financial statements, non-GAAP measures can offer real insight into how your business performs. Used without context, they invite confusion and erode trust.
What is a non-GAAP measure? A non-GAAP measure is a financial metric that does not follow standardized GAAP rules. Companies use these figures to supplement GAAP statements and highlight aspects of operations, profitability, or cash flow that standardized reporting may not capture on its own.
Is EBITDA a GAAP or non-GAAP measure? EBITDA is a non-GAAP measure. Because no single standard governs how it is calculated, businesses may define it differently, which is why clear disclosure of adjustments is so important.
Can non-GAAP measures replace GAAP financial statements? No. Non-GAAP measures are meant to complement GAAP reporting, not substitute for it. Lenders, investors, and regulators rely on GAAP statements as the consistent baseline for comparison.
Presenting EBITDA and other non-GAAP metrics consistently takes judgment, and the right approach depends on your industry, your stakeholders, and your goals. For guidance tailored to your business, reach out to the GBQ team. You can also explore our assurance and accounting services to see how we help companies report with confidence.