The Value Relevance of Mandatory Non‐GAAP Earnings

Abstract

This paper examines the value relevance of earnings components where there is a mandatory requirement to report generally accepted accounting principles (GAAP) earnings and non-GAAP earnings, and where the items to be eliminated from GAAP earnings are defined in detail. The setting is different from non-GAAP earnings disclosures presented in the United States and elsewhere, where managers have discretion over whether to report a non-GAAP earnings number, and what to exclude from GAAP earnings. Our mandatory setting enables us to report value relevance results that are not confounded by managers' discretionary choices regarding non-GAAP earnings exclusions.We use price-level regressions, based on the Ohlson (1995) model, to test for incremental and relative value relevance. The results show that non-GAAP earnings reported under a mandatory regime have higher value relevance than GAAP earnings. The disaggregation of these items is useful to investors in a setting where managerial motivations are minimized.

A comparison of the value relevance of interim and annual financial statements

“…Following Barth, Landsman and Lang (2008), Devalle et al (2010), Hellstrom (2006) and Venter et al (2014), we used a levels approach and winsorised all the variables at a 95% level to mitigate the effects of outliers in the sample (Barth et al 2008). We recognise that size could have an effect on the inferences drawn from level specifications and scaled all our variables with number of shares 3 months after reporting date (see Barth & Clinch 2009).…”

“…The approach that we follow for step 2 is similar to that followed by Venter et al (2014), where the authors tested whether headline earnings (i.e. non-IFRS earnings as measured based on certain criteria specified by the JSE) have where MVE it is the market value of equity 3 months after annual reporting date, BVE_INT it is the book value of equity for firm i at the end of the interim period (t), BVE_ADD it is the book value of equity for firm i at the end of the annual reporting period (t) minus BVE_INT it ; EARN_INT it is the net profit after tax for firm i for the interim financial period under examination (t), EARN_ADD it is the net profit after tax for firm i for the annual period under examination (t) minus EARN_INT it , and other variables are as specified earlier.…”

“…Similarly, McNichols and Manegold (1983) conclude that the marginal information content of an annual report is greater when it is not preceded by an interim report. Following Biddle, Seow and Siegel (1995), incremental comparisons are relevant when one or more accounting measures are taken as given and, thus, where it is necessary to assess the incremental contribution of the measures (also see Venter et al 2014). We argue that incremental comparisons are relevant to both book value of equity and earnings.…”

“…This appears to be true. Examples of studies that use annual financial statement information to test for value relevance include the following: Chen and Zhang (2007), Clarkson et al (2011), Collins, Maydew and Weiss (1997), Dimitropoulos and Asteriou (2008), Filip and Raffournier (2010), Francis and Schipper (1999), Hellstrom (2006), Liu and Liu (2007) and Venter, Emmanuel and Cahan (2014). Compared to the above, no prior study could be found that examines the value relevance of interim financial statement information.…”

Les mesures financières hors normes – La profession comptable pourrait bien détenir la solution

“…Par ailleurs, l'absence d'une quelconque forme de standardisation des mesures permises valide l'importance de laisser aux entités la liberté de moduler leurs indicateurs de performance en fonction de leurs caracté-ristiques spécifiques. En effet, plusieurs sont d'avis que la direction de l'entité est la mieux placée pour identifier les ajustements appropriés dans leur contexte spécifique (Holtzman et al, 2003;Venter et al, 2014). À la lumière de la réglementation adoptée, l'objectif serait donc de limiter les comportements opportunistes, mais sans toutefois empêcher la présen-tation d'informations pertinentes.…”