Bridging the Gaps in GAAP

Here are eight critical considerations for combating the creativity crisis in accounting from Tony Wayne at Cfo.com. This is a shortened version of the article, but the whole thing is well worth a read.

The growth in disclosures of non-GAAP information has been a response to demand from investors and the financial community, as well as increased regulatory requirements and scrutiny. By and large, this visibility and transparency is essential to successfully discharging the overriding fiduciary duty mentioned above.

To combat excessive creativity in reporting (intentional and otherwise) and to curb the resultant manipulation and potential crisis of misguided distortion that Drew rightfully warned us about, there are eight “Critical Considerations” (I call them CCs) that CFOs must address to ensure reporting is accretive to and does not impair enterprise value.

1. Cost of Capital — Industry, market, and specific risk premia elements must be emphasized.
2. Supporting non-GAAP information must be Consistently and Credibly presented.
3. The package must be Comprehensive 
4. The inherent Constraints/gaps in the GAAP financial package and the limitations in the audit/attest confirmation process must be countered 
5. The drivers, details, and communication of Costs and Cash flow demand prioritization.
6. Compliance with Controls — Scorecards demonstrating that adequate financial and operational controls are in place and functioning warrant a section in the package.
7. Customers and Competitors — Visibility and prominence as to who we are serving, who we could be serving, how we’re serving them, and who else is trying to serve them is vital to decision-makers.
8. The Cornerstone of the Capability premium — The pre-revenue, embryonic unicorns in development-stage industries, the multiples being paid for them, and the leverage taken on to chase their so-called “capability premiums” — capabilities that a company doesn’t have and wants to acquire rather than develop from scratch — are reflected in the absolutely extraordinary increase in private equity capital over the past dozen years, post-2008 in particular.

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