LOS G requires us to:
describe presentation choices, including non-GAAP measures, that could be
used to influence an analyst’s opinion
a. The companies may choose to present the financial statements in a manner not required by the applicable financial reporting standards. The financial statements, so prepared, are called the Pro-forma financial statements. There are no universal guidelines to prepare such statements and companies may use their own discretion in calculating Pro-forma earnings. In doing so, the companies may include or exclude items depending on estimated relevance. These statements usually exclude depreciation, amortization, restructuring expense, and one-time charges.
The Pro-forma statements are not fraudulent or dishonest statements; the excluded items in these statements are still reported but are not included in earnings.
The Pro-forma statements differ from company to company.
b. The reporting standards, however, have more universal and strict guidelines for preparing the financial statements.
c. EBITDA, for example, eliminates the impact of depreciation/amortization and restructuring charges on the profits. Adjusted EBITDA, on the other hand also excludes a few more items such as operating leases, equity-based compensation, acquisition-related charges, impairment charges for intangibles, long-lived assets, profits/losses on debt extinguishment, litigation costs, etc. Adjusted EBITDA is a non-GAAP measure of presentation in the financial method.
d. However as per the requirement of GAAP, if a non-GAAP financial measure is used to display in the financial statement, the companies must also display the most directly comparable GAAP measure with equal prominence.
There should also be a reconciliation of non-GAAP measures with the GAAP-based measure, accompanied by an explanation, as to why the non-GAAP method is more useful.
e. The IFRS also has similar requirements.