Companies are increasingly using nonstandard metrics—tailored accounting treatments that alter traditional accounting rules to present financial results. Not surprisingly, these measurements generally present a rosier view of the company’s financial performance.
Should companies use nonstandard metrics? And if so, in what context? A recent Wall Street Journal article (subscription required) illustrates how financial information is being used in public filings that substantially alter the way “adjusted profit” is calculated and reported. It says 40 companies that went public in 2014—about 18 percent of all U.S. initial public offerings for the year—reported losses under traditional accounting rules but showed profits using nonstandard metrics.
The companies generally argue that useful investor information is contained in the nonstandard presentations, particularly when one-time costs or unusual items are excluded. The debate concerns which items are relevant to a company’s future or current operating performance and whether disclosures and presentation are clear enough when nonstandard metrics are presented.
Careful investors must scrutinize these nonstandard metrics and fully understand the alternate results derived from these metrics. While some companies meticulously explain their nonstandard metrics—and all must disclose financial statements using traditional accounting methods—nonstandard metrics open the door to confusion and the potential to disguise results companies would rather not discuss.
Depending on how the information is presented and disclosed, you could get useful information … or distorted information. If distorted figures are used to calculate bonuses or borrow money or as the basis of an investment in the company, there could be distorted results. This accounting fraud risk should be carefully monitored.