Generally Accepted Accounting Principles, or GAAP, also known as Accounting Standards, is
    a term used to describe a standard framework of guidelines that accountants follow when
    recording transactions and preparing financial statements.  Many companies and financial
    analysts use non-GAAP measures as well, and most of the time it makes the numbers look
    better.  Better numbers for a press release is not the only advantage to non-GAAP figures,
    however, financial analysts also use them as a better way to gauge the growth of a company
    in relation to it's peers.

    If you want to get the GAAP
    numbers, just go to the company's
    most recent quarterly or annual
    filing and look at the income
    statement.  If you want to see the
    non-GAAP measures, you can also
    find them in the quarterly or annual
    report, as well as in press releases,
    and in historic and future earnings
    projections.  Most of the time, when
    earnings per share are mentioned,
    they are qualified as either GAAP,
    non-GAAP or something else, but
    sometimes they are not properly
    qualified.  You'll also need to
    ascertain whether or not you are
    dealing with earnings per share on
    a basic level, or a fully diluted level.  
    This can also be found in the
    company's income statement.

    What exactly is stripped out in non-GAAP numbers may vary a little bit from industry to
    industry, but generally we find things like amortization of intangibles, share-based
    compensation expense, restructuring charges, senior debt amendment fees and gain (loss)
    on extinguishment of debt, etc. etc.  It is important to note that all of these expenses are very
    material to the future success of the company, analysts just like to use non-GAAP numbers to
    be able to judge the core growth prospects a little better. Company management also uses
    non-GAAP figures to understand, manage, and evaluate the company's business results and
    make operating decisions. Companies often make decisions regarding staffing, future
    management priorities and how the company will direct future operating expenses and so
    forth based on non-GAPP measures.

    Despite non-GAAP results also being generally accepted, we must take the time to examine
    what the differences are, and if there are any red flags hidden.  Are non-GAPP earnings
    climbing or sinking with a direct relationship to GAAP earnings, or is their a discrepancy?  Is
    the company spending too much on restructuring charges or financing expenses in relation
    to their non-GAPP results?  What is the company's history of the difference between GAAP
    and non-GAAP look like in relation to it's competitors?  All of these questions are worth
    asking, especially when looking at potential value and growth plays.

    If the company uses non-GAAP figures, they will generally include a table or some other
    easily comparable reconciliation review either in the quarterly or annual report or in a
    supplemental press release.  This is usually an easy way to see a summary of the
    differences between GAAP and non-GAAP on a top line, bottom line, margin and per share
    GAAP Versus Non-GAAP
    February 14, 2011  PSW Staff
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