Non-Generally Accepted Accounting Principles (non-GAAP) measures are figures that are not legally defined as opposed to GAAP measures which are specified by the laws of every country in order to ensure a true and fair view. The European non-GAAP disclosures will be examined with respect to transparency and consistency across companies, countries and time horizons.
The thesis will point out the ambiguous character of non-GAAP reporting, being both informative and opportunistic. The carried out sample studies of European firms previous findings that non-GAAP reporting is a common procedure in Europe and that usage varies across European countries and industries. Moreover, it extends existing literature by showing that measures even vary within the same industry and over time and that individual factors, such as the variable pay determination of executives, might be explanatory factors for the usage of non-GAAP figures.
Table of Contents
1 Introduction
2 The use of non-GAAP disclosures in financial reporting
2.1 Characteristics of non-GAAP measures
2.2 Ambiguous character of non-GAAP reporting
2.1.1 Informative character
2.1.2 Opportunistic character
3 The European regulatory environment
3.1 National regulatory environment across countries
3.2 European supranational regulatory environment
3.3 International Financial Reporting Standards
4 Empirical evidence about non-GAAP reporting
4.1 Usage of non-GAAP reporting across Europe
4.1.1 Disclosure of non-GAAP measures
4.1.2 Adjustments of GAAP measures
4.1.3 Prominence of non-GAAP measures
4.1.4 Reconciliations to GAAP measures
4.2 Factors influencing non-GAAP reporting
4.2.1 Macroeconomic factors
4.2.1.1 Institutional environment
4.2.1.2 Economic environment
4.2.1.3 The introduction of IFRS
4.2.2 Company-specific characteristics
4.2.2.1 Independence of Board of Directors
4.2.2.2 Executive compensation
4.2.2.3 Information environment
4.2.3 Miscellaneous
5 Sample study
5.1 Usage of non-GAAP reporting in the investigated companies
5.1.1 Disclosure of non-GAAP measures
5.1.2 Adjustments of GAAP measures
5.1.3 Prominence of non-GAAP measures
5.1.4 Reconciliation to GAAP measures
5.2 Company-specific characteristics
5.3 Cross-country comparison
6 Conclusion
Research Objective and Topics
The primary aim of this work is to evaluate European non-GAAP financial disclosures with respect to their transparency and consistency across various companies, countries, and time horizons. It addresses the research question of how the regulatory environment and institutional factors influence the reporting choices of managers, and whether these practices align with established supranational recommendations.
- The ambiguous nature of non-GAAP reporting as both an informative and opportunistic management tool.
- The impact of the European regulatory environment and IFRS on corporate disclosure practices.
- Empirical evidence on the usage, prominence, and reconciliation quality of non-GAAP measures across Europe.
- The role of firm-specific characteristics, such as executive compensation and board composition, in influencing reporting behavior.
- A comparative sample study of companies in the chemical and pharmaceutical industries.
Excerpt from the Book
2.1.2 Opportunistic character
However, non-GAAP reporting causes serious concern among regulators and users of financial statements due to management’s divergent motives (Young, 2014, p. 4). Adversaries generally argue that managers use these measures in pursuance of presenting a superior performance. This claim is known as the manipulation hypothesis (Isidro and Marques, 2008, p. 2). Managers prefer financially more attractive results, because they assume that investors anticipate higher returns in the future if the current performance is excellent (D’Avolio et al., 2001, p. 144). The opportunistic character has been proven in studies analyzing European press releases. Studies show that underperforming companies are significantly more prone to disclose non-GAAP measures and to put more prominence on them than companies that satisfy benchmarks (Hitz, 2010, p. 5; Isidro and Marques, 2009, p. 23). Remarkably, the probability that non-GAAP figures of underperforming companies beat the benchmark is higher than the probability that they disclose a non-GAAP figure that misses the benchmark (Isidro and Marques, 2015, p. 113).
If management indeed tries to influence in a distorting way, the investors’ perception is crucial. A scenario was investigated where companies disclosed negative GAAP earnings but positive non-GAAP earnings (Andersson and Hellman, 2007, p. 284). Analysts who were given both measures predicted significantly higher EPS in contrast to analysts that were given the GAAP measure only. It shows that investors are indeed influenced through non-GAAP disclosures (Andersson and Hellman, 2007, p. 293).
Consequently, alternative performance measures create value for investors, but only under the condition that they are used in a transparent and consistent way. Subsequently, Chapter 3 will inspect the fundamental rules with regard to non-GAAP disclosures in Europe which, in turn, affect the transparency and consistency of reporting.
Summary of Chapters
1 Introduction: Provides an overview regarding the rise of non-GAAP reporting and the study's objective to examine transparency and consistency across Europe.
2 The use of non-GAAP disclosures in financial reporting: Characterizes non-GAAP measures and contrasts their informative potential with their potential for opportunistic manipulation.
3 The European regulatory environment: Describes the fragmented national and supranational regulatory landscape and the role of IFRS in European financial reporting.
4 Empirical evidence about non-GAAP reporting: Synthesizes previous literature on disclosure trends and identifies external and firm-specific factors influencing reporting behavior.
5 Sample study: Analyzes nine companies in the chemical and pharmaceutical sectors to evaluate reporting behavior, consistency, and the impact of managerial discretion.
6 Conclusion: Summarizes the findings, highlighting the persistent inconsistency in terminology and reporting across the analyzed European sample.
Keywords
non-GAAP measures, financial reporting, alternative performance measures, IFRS, earnings management, transparency, consistency, reconciliation, Europe, corporate disclosure, management discretion, executive compensation, board independence, information environment, capital markets.
Frequently Asked Questions
What is the core subject of this thesis?
The thesis focuses on the transparency and consistency of non-GAAP financial reporting within Europe, examining how these measures are used by firms beyond legally defined GAAP accounting.
What are the central themes of the research?
The study revolves around the characteristics of non-GAAP reporting, the influence of regulatory environments, the impact of firm-specific incentives, and the empirical evaluation of reporting practices across different European regions.
What is the primary objective of this work?
The objective is to analyze whether the use of non-GAAP measures leads to consistent and transparent reporting and to identify the drivers behind reporting behaviors in European companies.
Which scientific methods are employed throughout the document?
The work combines a review of existing literature with an empirical sample study of nine companies from the chemical and pharmaceutical industries, using quantitative correlation analysis to evaluate factors influencing reporting.
What is covered in the main body of the work?
The main body examines the theoretical background of non-GAAP reporting, the European regulatory framework, prior empirical evidence, and a detailed sample study evaluating the reporting behavior of selected firms over a ten-year period.
Which keywords best characterize the work?
Key terms include non-GAAP measures, financial reporting, earnings management, transparency, consistency, reconciliation, and managerial discretion in corporate disclosures.
What specific observation does the author make about reporting terminology?
The author observes an extreme inconsistency in reporting terminology across companies, noting that identical performance metrics are labeled differently, such as using "Operating income" versus "Operating profit" for EBIT.
How does the author interpret the role of managerial discretion?
The author concludes that managerial discretion is the primary factor driving non-GAAP disclosures, as evidence from the sample study suggests that variable pay incentives motivate managers to exclude certain expenses in order to improve reported performance figures.
Why does the author argue that reconciliation quality has improved?
Despite the lack of enforceable regulations, the author identifies an upward trend in the frequency and detail of reconciliations of special items in annual reports over the past decade.
- Citar trabajo
- Christoph Beis (Autor), 2017, Transparency and consistency of non-GAAP reporting across Europe, Múnich, GRIN Verlag, https://www.grin.com/document/1268613
