The practice of reporting manager-adjusted 'pro forma' earnings numbers in quarterly earnings press releases has attracted considerable attention in recent years in the United States. Prior research suggests that while some managers report these adjusted numbers to better reflect core earnings, others may use these earnings adjustments to meet strategic earnings targets on a pro forma basis when they fall short based on GAAP reporting standards. Assuming the latter motivation could potentially mislead investors, the difficulty lies in distinguishing the 'good guys' from the 'bad guys.' Using hand-collected pro forma earnings data, we investigate the extent to which different types of earnings adjustments affect the spread between pro forma earnings and GAAP earnings from continuing operations. Moreover, we investigate which types of adjustments managers use to meet strategic earnings targets. In addition to the exclusion of one-time items like restructuring charges, the results indicate that managers often exclude recurring expenses such as depreciation, research and development, and stock-based compensation to meet these strategic targets. The exclusion of recurring items is especially indicative of aggressive pro forma reporting. Finally, we find that firms that report adjusted earnings numbers only sporadically are more likely than firms that adjust earnings figures on a regular basis to use pro forma reporting to achieve strategic earnings targets by excluding recurring items.

The number of firms reporting earnings on a non-GAAP basis has increased dramatically over the last decade, and non-GAAP reporting is now commonplace in capital markets. This proliferation of non-GAAP reporting has renewed both regulators' and standard setters' interests in these alternative performance metrics. For example, the SEC, FASB, and IASB have all recently questioned what this increasing reporting trend means for IFRS-and US-GAAP-based reporting and whether these measures are misleading to investors. This increasing focus on non-GAAP metrics motivates us to synthesize the nearly two decades of research on non-GAAP reporting to provide insights on what academics have learned to date about this reporting practice. Then, we utilize a novel dataset of detailed non-GAAP disclosures to provide new descriptive evidence on current trends in non-GAAP reporting and its recent proliferation. Finally, we discuss important questions for future researchers to consider in moving the literature forward. K E Y W O R D Snon-GAAP earnings, regulation, standard setting INTRODUCTIONManagers, financial analysts, investors, lenders, compensation committees, and other stakeholders often evaluate a company's earnings performance using metrics other than GAAP-based net income. These stakeholders generally start with GAAP earnings and back out (or exclude) earnings components that they deem to be transitory or noncash. They argue that these excluded items are less relevant for assessing firm performance and that the "non-GAAP" performance number is more appropriate for their intended purposes. The growth in these non-GAAP metrics over the past 20 years reflects a widespread acceptance of non-standard performance metrics as a way to evaluate firm performance.Although skeptics have frequently viewed non-GAAP disclosure as a threat to the traditional GAAP-based income statement, regulators recognize that non-GAAP metrics can be informative to investors and have laid the groundwork for firms to disclose these metrics in a transparent manner. Standard setters and regulators have recently renewed J Bus Fin Acc. 2018;45:259-294. wileyonlinelibrary.com/journal/jbfa

We explore whether investors’ perceptions of pro forma earnings numbers have changed following the regulation of pro forma reporting imposed by the Sarbanes‐Oxley Act of 2002 (SOX). First, we find that investors appear to pay more attention to pro forma earnings disclosures in the post‐SOX period, consistent with the notion that they perceive that regulation generally renders these disclosures more credible. Second, the results indicate that investors discount aggressive pro forma earnings reports in both periods. However, they appear to discount at least some potentially misleading pro forma earnings disclosures more in the post‐SOX period. Finally, our results imply that the regulation of pro forma reporting has increased the average quality of pro forma earnings disclosures by filtering out those that are most likely to be misleading. These results are consistent with the conclusions that (1) the quality of pro forma reporting has improved following SOX, and (2) investors’ perceptions of pro forma earnings metrics have changed in the post‐SOX regulatory environment.

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Accounting standard setters continue to grapple with conceptual distinctions between components of net income and other comprehensive income (OCI). Bank regulators are dealing with the recommendations of Basel III for Tier 1 Capital, which includes more components of accumulated other comprehensive income (AOCI). Motivated by these standard setting and regulatory debates and changes, I review the literature on the investor and contracting usefulness of comprehensive income, OCI, OCI components and AOCI. I present ideas for future research, including opportunities arising from Basel III changes to bank regulatory capital.Accounting and Finance 56 (2016) 9-45 © 2016 AFAANZ Other comprehensive income component (ASC 220-10-45-10A) ReferenceUnrealised holdings gains and losses on available-for-sale securities. ASC 320-10-45-1 Unrealised holdings gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category.ASC 830-30-45-12Amounts recognised in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an otherthan-temporary impairment recognised in accordance with ASC 320-10-35 if a portion of the impairment was not recognised in earnings.ASC 320-10-35Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of available-for-sale securities previously written down as impaired.