Author Archives: bevin.bullock

This article raises several interesting issues about how revenue is calculated under GAAP and under pro forma calculations, and the issues with both numbers.  On the one hand, GAAP can be too conservative because it includes one-time and noncash expenses; for this reason, the author mentions that many investors disregard this number, as they do not feel it gives them an accurate sense of a company’s prospects for success.  Also, FASB has proven itself to be too slow to make changes to the GAAP standards in the face of events such as the attacks of 09/11/01 and the intricacies of accounting in the software sector.

However, pro forma calculations also are far from perfect, as they are not audited and are therefore subject to abuse.  While GAAP requires that a company calculate its earnings similarly from one quarter to the next, pro forma calculations can change quarterly.  I think that the authors are on the right track when they mention that it would be best for investors to be provided with two separate numbers – the GAAP figure and the operating earnings, as this would allow investors to use both an audited figure and one that excludes numbers that are not relevant to the ongoing running of the company.  Although there is currently a large gap between these two figures for many companies, by standardizing the way operating earnings are reported investors could be assured that both number provide accurate and relevant information about a corporation’s financial health.