Past Abuses and Sarbanes-OxleyThe dot-com boom of the late 1990s and early 2000s saw many emerging companies develop new financial metrics to communicate their potential worth to eager investors. Public company earnings and press releases frequently supplemented GAAP information with pro forma non-GAAP data.However, because regulators had provided very little guidance and because there was no clear definition of the term “pro forma,” one company’s pro forma earnings could not be consistently measured against another’s. Furthermore, without uniform characteristics, companies developed their own pro forma measurements to focus investor attention where management wanted.

In December 2001, the SEC issued a cautionary advice release (Release 33-8039, FR 59) to remind registrants of the need to comply with the antifraud provisions of the federal securities laws when providing pro forma financial information in earnings releases. The SEC warned public companies that non-GAAP financial information can mislead investors if it is not presented appropriately.

The SEC made an even stronger statement in January 2002 when it announced the settlement of its first enforcement case involving non-GAAP earnings information (against publicly traded Trump Hotels & Casino Resorts). The SEC alleged that the company made misleading statements in its Q3 1999 earnings release in order to create the impression that it exceeded analysts’ expectations.

Shortly thereafter, the United States Senate passed the Public Company Accounting Reform and Investor Protection Act and the House passed the Corporate and Auditing Accountability and Responsibility Act, which together, were signed into law as the 2002 Sarbanes-Oxley Act. Section 401(b) of the Sarbanes-Oxley Act required the SEC to develop rules regarding financial information that is computed on a basis other than GAAP, and in January 2003, a final rule was issued by the SEC.

Ultimately, the SEC’s goal was to ensure that investors are not misled by financial information that differs from what is presented in the GAAP basis financial statements.

The SEC’s Rules — in Plain EnglishBroadly speaking, the SEC has three key rules that govern non-GAAP financial measures. These rules generally apply to all registrants, regardless of market capitalization:n Regulation G is an anti-fraud provision that applies to all company communications (press releases, conference calls, webcasts, etc.). Under Regulation G, registrants cannot make public a non-GAAP financial measure that contains an untrue statement of

a material fact or omit a material fact that is necessary to make the information not misleading.

When a registrant publicly discloses non-GAAP financial measures, the registrant must provide (a) the most directly comparable financial measure determined in accordance with GAAP; and (b) a quantitative reconciliation of the differences between the non-GAAP measure and associated comparable GAAP measure.

For non-GAAP measures that are presented orally, these two disclosure requirements can be met by posting the required information to the registrant’s website and disclosing the availability of these disclosures.

n Item 10(e) of the SEC’s Regulation S-K governs the use of non-GAAP measures in annual (10-K) and quarterly (10-Q) reports and contains even more extensive rules for using non-GAAP measures than the general standard under Regulation G.

To comply, non-GAAP financial measures must be accompanied by the quantitative reconciliation required by Regulation G; the reason that management believes the use of the non-GAAP financial measure is useful for an investor; the additional purposes for which management uses non-GAAP measures; and the most directly comparable GAAP financial measure must be presented with equal or greater prominence than the non-GAAP measure.

A key provision in Item 10(e) is the prohibition of using terms such as “non-recurring,” “infrequent” and “unusual” under certain circumstances.

n Item 2.02 of Form 8-K requires public companies to furnish to the SEC all earnings releases or announcements disclosing material non-public financial information. This requirement exists even if the registrant does not present any non-GAAP financial information. In the Form 8-K, the registrant should briefly identify the release or announcement and include the related text as an exhibit.

In November 2009, the SEC settled charges against SafeNet Inc. and several of its officers and employees in connection with an alleged earnings management scheme that materially misstated the company’s GAAP and non-GAAP financial results. The SEC charged that the defendants violated Regulation G by reporting non-GAAP earnings that improperly excluded certain ordinary expenses as nonrecurring charges. Additionally, the company’s chief executive officer and chief financial officer allegedly mischaracterized these items in earnings calls.

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more: http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2012_11/GAAP-or-Non-GAAP-.aspx#ixzz3EbhWjKQt

The SEC ‘Lightens Up’Also in 2009, SEC staff reviewed its interpretations of non-GAAP measures to ensure that the existing non-GAAP guidance was not causing companies to keep key information out of their SEC filings. The SEC believed that while many registrants frequently include non-GAAP measures in earnings releases, many had been reluctant to include these same measures in SEC documents because of concerns about future SEC staff comments.

As a result of its review, the SEC issued new Compliance and Disclosure Interpretations (C&DIs) on the use of non-GAAP financial measures in January 2010. While the SEC’s rules on non-GAAP financial measures were not amended, the new C&DIs provided some new and revised interpretations, which effectively provided registrants with more flexibility to disclose non-GAAP measures in SEC filings.

The most important change was the SEC’s revised guidance on nonrecurring, infrequent or unusual items. Item 10(e) of Regulation S-K prohibits adjusting a non-GAAP measure to eliminate or smooth items described as nonrecurring, infrequent or unusual if the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the last two years.

The SEC made it clear to registrants that they can still adjust for such a charge or gain; however, they cannot describe the charge or gain as nonrecurring, infrequent or unusual unless it meets the criteria specified in the previously sentence.

The Good, the Bad and GrouponGroupon’s well-publicized use of non-GAAP financial measures has illuminated an emerging trend in financial reporting: corporate America’s use of these indicators is once again on the rise.When Groupon filed for its initial public offering in 2011, it boldly declared “we don’t measure ourselves in conventional ways.” When Groupon introduced financial indicators such as “adjusted consolidated segment operating income,” or adjusted CSOI, the investment community, as well as the SEC, severely criticized Groupon for its use of non-GAAP measures and suggested the company was conceited and otiose.

In fact, one financial pundit suggested that CFOs might soon skip straight to EBE — earnings before expenses. Whether Groupon’s use of non-GAAP measures were self-serving or were actually beneficial to investors and analysts, the company’s management deserves some credit for its efforts to translate complex GAAP-based information into financial data that told its story.

To be sure, the use of non-GAAP measures must be made with care and thoughtfulness. However, with clearly defined rules in place, a more relaxed regulatory environment and increasingly complicated GAAP data and business models to analyze, proactive executives should evaluate their communication strategies with investors and business partners and consider the potential benefits of non-GAAP measures.

Non-GAAP measures can be particularly useful in helping companies tell their story more effectively, which is becoming increasingly important given the evolving nature and complexity of today’s businesses.

Read more: http://www.financialexecutives.org/KenticoCMS/Financial-Executive-Magazine/2012_11/GAAP-or-Non-GAAP-.aspx#ixzz3EbhvVCjI

GAAP Implications on the Income Statement

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GAAP's assumptions, principles, and constraints can affect income statements through temporary (timing) and permanent differences.

KEY POINTS

Items that create temporary differences due to the recording requirements of GAAP include rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets.

Also there are events, usually one-time events, which create "permanent differences," such as GAAP recognizing as an expense an item that the IRS will not allow to be deducted.

The four basic principles of GAAP can affect items on the income statement. These principles include the historical cost principle, revenue recognition principle, matching principle, and full disclosure principle.

TERMS

fair market value An estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. An estimate of fair market value may be founded either on precedent or extrapolation but is subjective. Fair market value differs from other ways of determining value, such as intrinsic and imposed value.

deferred Of or pertaining to a value that is not realized until a future date, e.g. annuities, charges, taxes, income, either as an asset or liability.

Although most of the information on a company's income tax return comes from the income statement, there often is a difference between pretax income andtaxable income. These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).

Income statement

GAAP and IRS accounting can differ.

Such timing differences between financial accounting and tax accounting create temporary differences. For example, rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets may create timing differences. Also, there are events, usually one time, which create "permanent differences," such as GAAP, which recognizes as an expense an item that the IRS will not allow to be deducted.

To achieve basic objectives and implement fundamental qualities, GAAP has four basic principles:

The historical cost principle: It requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.

The revenue recognition principle. It requires companies to record when revenue is (1) realized or realizable and (2) earned, not when cash is received.

The matching principle. This governs the matching of expenses and revenues, where expenses are recognized, not when the work is performed or when a product is produced, but when the work or the product actually makes its contribution to revenue.

The full disclosure principle. This suggests that the amount and kinds of information disclosed should be decided based on a trade-off analysis, since a larger amount of information costs more to prepare and use. GAAP reporting also suggests that income statements should present financial figures that are objective, material, consistent, and conservative.

What it is:

The term earnings per share (EPS) represents the portion of a company's earnings, net of taxes and preferred stock dividends, that is allocated to each share of common stock. The figure can be calculated simply by dividing net income earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term. Because the number of shares outstanding can fluctuate, a weighted average is typically used.

How it works/Example:

Let's assume that during the fourth quarter, Company XYZ reported net income of $4 million. During the same time frame, the company had a total of 10 million shares outstanding. In this particular case, the company's quarterly earnings per share (or EPS) would be $0.40, calculated as follows:

$4 million / 10 million shares = $0.40

Why it Matters:

EPS is a carefully scrutinized metric that is often used as a barometer to gauge a company's profitability per unit of shareholder ownership. As such, earnings per share is a key driver of share prices. It is also used as the denominator in the frequently cited P/E ratio.

EPS can be calculated via two different methods: basic and fully diluted. Fully diluted EPS -- whichfactors in the potentially dilutive effects of warrants, stock options and securities convertible intocommon stock -- is generally viewed as a more accurate measure and is more commonly cited.

EPS can be subdivided further according to the time period involved. Profitability can be assessed by prior (trailing) earnings, recent (current) earnings or projected future (forward) earnings. Though earning

per share is widely considered to be the most popular method of quantifying a firm's profitability, it's important to remember that earnings themselves can often be susceptible to manipulation, accounting changes and restatements. For that reason, free cash flow is seen by some to be a more reliable indicator than EPS. Nevertheless, earnings per share remains the industry standard in determining corporate profitability for shareholders.

Securities and Exchange Commission

The Philippine Securities and Exchange Commission (SEC) aims to

strengthen the corporate and capital market infrastructure of the Philippines, and

to maintain a regulatory system, based on international best standards and

practices that promote the interests of investors in a free, fair, and competitive

business environment. SEC, as a member of the International Organization of

Securities Commissions (IOSCO) has to comply with the agreement with other

IOSCO members to adopt international accounting standards to ensure high

quality, transparent financial reporting with full disclosure as a means to attain

credibility and efficiency in the capital markets. The auditor's report refers to

"conformity with Philippine Financial Reporting Standards." Accounting standards

in the Philippines are approved by the Securities and Exchange Commission (SEC)

(http://www.iasplus.com/country/philippi.htm#0704). The Philippines has

adopted all IFRSs for 2005 with some modifications. These Philippine equivalents

to IFRSs apply to all entities with public accountability. that includes: